Can Someone Explain the Rule of 78?

If you google "rule of 78" the first explanation is pretty good

That didn't quite explain it. Like, if I pay off a $1000 loan at 8.25% monthly with a term of 24 months in only 12 months, how do they calc the prepayment penalty?

With a simple interest loan (aka flat interest rate) the loan account is charged with the full amount of interest at the beginning of the loan. Unlike a reducing interest loan where the interest is charged each month.

When you wish to pay out a simple interest loan early, the interest rebate is calculated using the rule of 78 as explained in the article referred to. One point to remember, a simple interest rate of 8% over five years works out to around 14% reducible monthly.

So, a penalty is not being calculated as such, it just happens to be the difference between the two ways of working out the final payment.

Hope this helps, Rusty

But the loan is precomputed. Please write out the steps to arrive to the rebate. Thanks!!!!

Post your calculations and I'll tell you what's wrong.

Rule of 78 method

------------------------------------------------------ $24331.80 *($405.53*6)=$21898.62 $21898.62-$20000=$1898.62 $1898.62-$816.65=$1081.97

Normal Method

-------------------------------------------------------- $24331.80*($405.53*6)=$21898.62 $21898.62-$20000=$1898.62 $1898.62-$772.57=$1126.05

Difference b/w the two methods: $44.08

Can you check this? Thanks!!!!

These were ALL your calculations?

You seem to be doing it in your head!

Write the calculations down and post them.

But these ARE all of them. Do you want the values I summed for $816.65 and $772.57?

$816.65=(60/1830)*$4331.80+(59/1830)*$4331.80+(58/1830)*$4331.80+...+(55/1830)*$4331.80=(345/1830)*$4331.80 (6 months interest from rule of 78 method)

$772.57=$133.34+$131.52+$129.70+$127.86+$126.01+$124.14 (6 months interest calculated normally)

Does this help?

Didn't you have to do the full calculation to check the first calculation was correct?

In the second calculation you haven't explained the calculation behind each number.

I got the numbers from a amortization calculator, OK. I then added up the interest paid each month to arrive at the number I subtracted from $24331.80-(405.53*6)=$21898.62. Here's the calculators:

Rule of 78:

You said the loan was for a term of 24 months but the calculations you did were only for 12 months.

Try entering in the amounts it asks for. That was for the original question. Oh, and here's the difference for $1000 at 8.25% monthly for

Rule of 78: $174.73 Normal: $270.43 Diff: $95.70

Why did you use 60 in the first calculation?

interest rebate

referred to.

The term was 60 months, or 5 years.