Rule of 78

[theone1975]

Can someone explain ruleof78, I have a personal loan which uses this and would like to pay it off, will i see any savings if I pay off early?

[CTSoxFan]

The rule of 78 was a way back in the pre-computer days to calculate interest on a simple interest loan. The interest amount is computed up front and tacked on to the principal, and then divided by the term. Basically you pay 12/78ths of the interest in month 1, 11/78ths in month 2 and so on until you hit the last month where you pay 1/78th. So if you borrowed $1,000 at 10%, your loan amount is actually $1,100, which you would pay in 12 payments of $91.67, regardless of when you pay it off (in contrast to a simple interest contract where you would only pay $87.92/month for the 12 months and $45 less in total interest, more if you paid it off earlier) These contracts are VERY favorable to lenders (which is why they are usually made to subprime borrowers who have limited/no other alternative).

 

Because the interest is calculated up front and tacked on to the principal, there is no benefit to paying it off early.

Edited March 11, 2013 by CTSoxFan

[theone1975]

That sucks, but thanks.... lesson learned