The denominator of a Rule of 78s loan is the sum of the integers between 1 and n, inclusive, where n is the number of payments. Calculations Ī simple fraction (as with 12/78) consists of a numerator (the top number, 12 in the example) and a denominator (the bottom number, 78 in the example). That means if you pay off the loan early, you'll end up paying more overall for a Rule of 78s loan compared with a simple-interest loan. But because of some mathematical quirks, you end up paying a greater share of the interest upfront. The Rule of 78 is designed so that borrowers pay the same interest charges over the life of a loan as they would with a loan that uses the simple interest method. If the borrower pays off the loan early, this method maximizes the interest paid by applying funds to the interest before principal. As such, the borrower pays a larger part of the total interest earlier in the term. The outcome is that more of the interest is apportioned to the first part or early repayments than the later repayments. This is an accurate interest model only based on the assumption that the borrower pays only the amount due each month. The name comes from the total number of months' interest that is being calculated in a year (the first month is 1 month's interest, whereas the second month contains 2 months' interest, etc.). Also known as the "Sum of the Digits" method, the Rule of 78s is a term used in lending that refers to a method of yearly interest calculation.
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