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:
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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!!!!!
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.
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:
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