Rule of 78

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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 78.

A practice, called the Rule of 78, means that lenders front-load the interest they charge on a short-term loan to guarantee their profit if you pay off your loan before the end of its term.

In other words, you pay most of the interest before you begin to make substantial repayment of principal.

For example, on a one-year loan, you'd pay 15% of the interest in the first month, 14% in the second month, and only 1% in the last month. The practice is called the Rule of 78 because that's the sum of the twelve payments in a one-year loan (1+2+3+...+12 = 78).

It's illegal to calculate loans with terms longer than 61 months using the Rule of 78, and a number of states outlaw the practice for all loans. But where the Rule of 78 is used, the loans may be described as precomputed or precalculated loans, or as loans that offer a rebate of finance charges if you prepay.

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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.
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.