The Rule of 78 has been used to govern how interest is assigned on personal loans. Could someone please confirm that the loan providers are not allowed to use this rule for new loans as from this month ? This is what I have heard.
Thanks Roman
correct
tim
I have read the new regulations with their complicated formula in paragraph 4.
In practice, what difference will the new legislation make, compared to "Rule of 78"?
By the way, the new legislation takes effect on 31.05.05, so is not yet in force.
I have not studied the complicated formulas but it was said that under the Rule 78 the outstanding balance one needed to repay, when redeeming early, always worked out higher than it should be for it to be fair calculation.
Roman
The Rule of 78 is remarkably accurate for such a simple formula. The problem is that it is usually acoompanied by 1 or 2 months' additional interest for early repayment, this is what gives it a bad name.
While I did not go into it the impression was given in various articles that even if there is no redemption penalty this is rule "bad" on it's own merit. From one such source> If the loan is paid off early, the lender may use the rule of 78 to determine how much interest you do not have to pay. In many cases, due to the interest element being larger in the repayments at the beginning of the loan, usually a large amount of capital left to be repaid.
Roman
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