rule of 78s financial definition of rule of 78s. rule of 78s finance term by the Free Online Dictionary.

Rule of 78

A practice in which lenders amortize repayment of short-term loans in a way that the borrower pays most of the interest earlier. For example, in a 12-month loan, the borrower will pay nearly all of the interest over the first, say, six or seven months before his/her payments cover any principal at all. The Rule of 78 guarantees that the lender will still make a profit if the borrower repays the loan early. However, it does not do anything to protect the borrower and is illegal to use for loans with a term longer than 61 months.

rule of 78s

A method for computing the refund due when a borrower wants to pay off an add-on interest loan at an earlier time than the maturity date. The reason there would be any refund at all is because all the interest is calculated up front, for the entire loan, and then paid in equal monthly installments. If the loan is repaid early, some portion of the interest has not been earned, but it has already been paid. Use of the rule of 78s results in the lender “earning” more of the interest than one might otherwise think. To calculate, you need to use a fraction that changes every month. For the first month,the numerator (top number) is the number of months remaining in the loan. The denominator (bottom number) is the sum of the digits for the number of months of the original loan.If the loan is for 1 year, then you add 1+ 2 + 3 + 4 + … + 11 + 12 = 78. For the first month, with 12 months remaining in the loan, the fraction is 12/78. According to the method,¹²/78 of the interest has been earned in the first month, or 15.38 percent.You might think that only 1/12 of the interest—8.33 percent—has been earned,since only one month has passed,but that's the way the rule of 78s works— to the lender's advantage. The next month, you change the numerator by adding the number of remaining months (11) to last month's numerator of 12.The numerator is then 11 + 12 = 23, so 23/78 of the interest has been earned, or 29.48 percent. For month 3, the numerator is 10 + 23, and so on.

Mentioned in	?		References in periodicals archive	?		Financial browser	?		Full browser	?
add-on interest	Furthermore, if you pay off your pre-computed auto loan early, the lender often uses an outdated and expensive formula known as the rule of 78s to make you pay a large sum of money for paying off the loan early. Getting That Car Loan Simple Interest Is the Best by Pete Lance / Finance and Investment community Taxpayers currently accounting for stated interest on short-term consumer loans under the Rule of 78s method may automatically change to the constant yield method under the general automatic method change procedures of Rev. Updated and revised mass automatic accounting method procedure issued by Ottley, Curtis / The Tax Adviser In 1983, an IRS revenue ruling disallowed the rule of 78s on any amount exceeding the economic accrual of interest. Privity, statute of limitation in tax case by Journal of Accountancy	Rule 396 Rule 3b-3 Rule 405 Rule 415 Rule 419 Rule 434 Rule 5 Rule 500 Rule 72(t) Rule 80A Rule 80B Rule Against Accumulations rule against perpetuities Rule G-32 rule in Shelley's case Rule Line Rule lOb-5 Rule NMS Rule of 18 Rule of 300 rule of 5 Rule of 69 Rule of 72 rule of 72s Rule of 78 rule of 78s Rule of Absolute Priority Rule Off Rule-Based Monetary Policy Rule-Based Policy Rule-Based Trade Policy Rules of Fair Practice Rules of Navigation Rules of Origin Rules of the Game Ruling Rumortrage Rump Run Run Charge Run of Paper Run of Schedule Run Rate Run to Settlement run with the land Runaround Runaway Runaway Gap Rundown Runner Running Ahead	Rule Interchange Format Rule joint Rule joint Rule Line Rule Lines Rule lOb-5 Rule Making Rule Making Rule Making Rule Making Rule Markup Language Rule NMS Rule of 18 Rule of 18s Rule of 20 Rule of 3 Rule of 3 Rule of 300 Rule of 300s Rule of 3s Rule of 3s rule of 5 Rule of 69 Rule of 69.3 Rule of 69s Rule of 70 Rule of 72 rule of 72s Rule of 78 Rule of 78 rule of 78s Rule of 8 Rule of 80 rule of 80-20 Rule of Absolute Priority rule of action Rule of Air Management rule of approximation rule of bigeminy Rule of capture rule of co-occurrence rule of confidentiality Rule of Coss Rule of court rule of cy pres rule of detachment rule of engagement rule of evidence Rule of Fair Practice Rule of false position Rule of Five rule of grammar Rule of inference rule of law rule of law rule of law Rule of Law and Human Rights

Mentioned in

References in periodicals archive

Financial browser

Full browser

add-on interest

Furthermore, if you pay off your pre-computed auto loan early, the lender often uses an outdated and expensive formula known as the rule of 78s to make you pay a large sum of money for paying off the loan early.

Getting That Car Loan Simple Interest Is the Best by Pete Lance / Finance and Investment community

Taxpayers currently accounting for stated interest on short-term consumer loans under the Rule of 78s method may automatically change to the constant yield method under the general automatic method change procedures of Rev.

Updated and revised mass automatic accounting method procedure issued by Ottley, Curtis / The Tax Adviser

In 1983, an IRS revenue ruling disallowed the rule of 78s on any amount exceeding the economic accrual of interest.

Privity, statute of limitation in tax case by Journal of Accountancy