Yusra3
VIP Contributor
The Rule of 78 is a method used by some lenders to calculate how much interest you pay on installment loans if you pay them off early. It allows lenders to collect more interest upfront compared to other interest calculation methods.
With the Rule of 78, interest is front-loaded so that you pay a larger portion of the total interest shortly after taking out the loan. As you make more payments, the interest owed declines according to a sum-of-digits formula.
This disproportionate allocation means less of your early payments go towards the principal balance. So if you pay off the loan ahead of schedule, you've already paid most of the interest.
The Rule of 78 can translate to higher interest costs overall compared to simple interest loans where interest accrues more evenly over the full term. Many states have laws limiting or prohibiting its use, especially for consumer installment loans.
When shopping for loans, make sure to understand the lender's interest calculation method and terms for prepayment to avoid unpleasant surprises. Sticking with standard amortizing loans is generally recommended.
With the Rule of 78, interest is front-loaded so that you pay a larger portion of the total interest shortly after taking out the loan. As you make more payments, the interest owed declines according to a sum-of-digits formula.
This disproportionate allocation means less of your early payments go towards the principal balance. So if you pay off the loan ahead of schedule, you've already paid most of the interest.
The Rule of 78 can translate to higher interest costs overall compared to simple interest loans where interest accrues more evenly over the full term. Many states have laws limiting or prohibiting its use, especially for consumer installment loans.
When shopping for loans, make sure to understand the lender's interest calculation method and terms for prepayment to avoid unpleasant surprises. Sticking with standard amortizing loans is generally recommended.
