# Can Someone Explain the Rule of 78?

How exactly did they calculate this:
Guy gets a \$20000 loan at 8% annually for 60 months Wins lottery and pays it off in 6 months. Lender gives him a rebate that turns out to be \$44 less then he
should've gotten, by using the rule of 78.
Here the article: http://www.bankrate.com/brm/news/dollardiva/19991012a.asp
I don't quite get the rule of 78. How did they calculate the rebate? What IS the rebate? This article leaves me with more questions than answers. Can you please explain? Thanks!!!!!
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If you google "rule of 78" the first explanation is pretty good
.
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Steve wrote:

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?
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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
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Rusty wrote:

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

Post your calculations and I'll tell you what's wrong.
--
Peter Saxton from London
snipped-for-privacy@petersaxton.co.uk
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Peter Saxton wrote:

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!!!!
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wrote:

Write the calculations down and post them.
--
Peter Saxton from London
snipped-for-privacy@petersaxton.co.uk
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Peter Saxton wrote:

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?
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wrote:

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.
--
Peter Saxton from London
snipped-for-privacy@petersaxton.co.uk
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Peter Saxton wrote:

>\$816.65=(60/1830)*\$4331.80+(59/1830)*\$4331.80+(58/1830)*\$4331.80+...+(55/1830)*\$4331.80=(345/1830)*\$4331.80
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: http://www.hughchou.org/calc/rule78.cgi Normal: http://www.hughchou.org/calc/genloan.cgi
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wrote:

You said the loan was for a term of 24 months but the calculations you did were only for 12 months.
--
Peter Saxton from London
snipped-for-privacy@petersaxton.co.uk
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Peter Saxton wrote:

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 24 months, that's paid off in 6 months.
Rule of 78: \$174.73 Normal: \$270.43 Diff: \$95.70
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wrote:

Why did you use 60 in the first calculation?
--
Peter Saxton from London
snipped-for-privacy@petersaxton.co.uk
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Peter Saxton wrote:

The term was 60 months, or 5 years.
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