The Rule of 78
can still be applied to existing loans.
For example, if a consumer had a pounds 10,000 loan which was being repaid over 15 years, but they decided to pay it off after only six years, the penalty would have been pounds 1,344 higher under the Rule of 78
than the new method.
The Rule of 78
- the name comes from adding up the 12 months in the year, starting by adding January (one) to February (two) and so on - was introduced in 1974.
You should also bear in mind that under an obscure clause called the Rule of 78
, even if you are able to pay the debt off early, you may still have to pay the interest you would have had to pay if the loan ran for its full term.
If your loan is calculated on what's called the rule of 78
, the interest is front-loaded so if you re-pay early, you end up being penalised, and the amount you will be charged to clear the loan is effectively the same as you would have paid in interest over the whole term.
uk has a personal loan comparison calculator which allows you to select only lenders who don't charge an early redemption penalty but it doesn't weed out those who apply the Rule of 78
The culprit is a complex calculation called the rule of 78
which loads most of the interest element of a loan on to the early repayments.
Many lenders use a tricky calculation called the Rule of 78
, by which they charge you part of the interest you'd have paid if you'd kept the loan running to its original end date.
The National Consumer Council welcomed the announcement, particularly the news the Rule of 78
was going to be scrapped.
The regulatory changes eliminated the use of Rule of 78
charges on early redemptions in favor of a sliding scale calculation as well as the removal of a dual-rate interest rate structure, which was replaced with a single-rate product.
And watch out for the Rule of 78
, a sneaky device by which lenders levy most of the interest on a loan in the early months and heavily penalise early settlement.