4/30/2023 0 Comments Rule of 78 loan calcLoans that last 36 months, 48 ââmonths and so on would follow the same format. Note that a 12 month loan has a rule of 78, but a 24 month loan would follow the rule of 300, since the numbers would add up to this amount. To use the rule of 78 on a 12 month loan, a lender would add the numbers within 12 months using the following calculation: It also makes it more difficult (if not impossible) for borrowers to benefit from the interest savings that might otherwise be achieved by prepaying a loan. ![]() The pre-calculated interest charges applied under the Rule of 78 ensure that a lender receives their share of the profits. In other words, according to the Rule of 78, there are few benefits or savings to be made by paying off a loan in full well before maturity. Under Rule 78, the borrower will pay a much larger portion of the interest earlier in the loan period. ![]() âHowever, if a borrower is considering the option of prepaying the loan, it makes a real difference. “If a borrower pays the exact amount owed each month during the term of the loan, the rule of 78 will have no effect on the total interest paid,” said Andy Dull, vice president of credit underwriting for Freedom Financial Asset Management, a debt relief business. The Rule of 78 interest structure favors the lender over the borrower in several ways. Understanding what type of financing will be applied to your loan repayment plan is critical, especially if you intend to repay the loan in advance. Under the Rule of 78, a lender weights interest payments in reverse order, giving more weight to the first few months of the loan repayment period. Borrowers pay more with the rule of 78 than with simple interest. It is widely viewed as unfair to borrowers who may decide to pay off their loans early to get out of debt. The rule of 78 may still be used by some lenders, but not by many. However, the rule can be applied to any loan term. It adds whole numbers between 1 and 12 months, which equals 78. ![]() The formula name is based on a 12 month loan term, which was common when the rule was created. The Rule of 78 is a method of calculating and applying interest on a loan that allocates a greater portion of the interest charges to past loan repayments. When the Rule of 78 is implemented, you pay interest so as to ensure that the lender receives their share of the profits even if a loan is prepaid.įortunately, the Rule of 78 was banned nationwide starting in 1992 for loans over 61 months, although it still may not apply in all states regardless of the state. Under this scenario they would have received a refund of $58.50, much more beneficial than the $45.00 refund.Some lenders use a tricky strategy known as the Rule of 78 to ensure that you pay more off your loan up front through pre-calculated interest charges. Thus the consumer would not receive as much of a refund if it were divided equally by 12 months ($6.50 per month). They in essence would retain the first three (3) numbers.12,11,10 or $33.00. If a person prepaid a consumer loan in 3 months, the financial institution would refund the sum of the "remaining" digits.(i.e. That figure is representative of the sum of digits by adding the numbers together.i.e. ![]() If $10,000 is lent and the precomputed finance charge is $3,000, the borrower owes the lender $13,000 at the time the loan is made, whereas a simple interest borrower owes the lender only the $10,000 principal and monthly interest on the unpaid principal.Ī simple explanation would be as follows: Suppose the total finance charge for a 12 month loan was $78.00. It should be understood that with precomputed loans, a borrower not only owes the lender the principal amount borrowed, but the borrower owes the finance charge as well. Once the finance charge has been identified, the Rule of 78s is used to calculate the amount of the finance charge to be rebated (forgiven) in the event that the loan is repaid early, prior to the agreed upon number of monthly payments. Finance charge, carrying charges, interest costs, or whatever the cost of the loan may be called, can be calculated with simple interest equations, add-on interest, an agreed upon fee, or any disclosed method. The Rule of 78s deals with precomputed loans, loans whose finance charge is calculated before the loan is made.
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