For a one year loan, the total number of digits is equal to 78, which explains the term the Rule of 78.
For a two year loan, the total sum of the digits would be 300.
With the sum of the months calculated, the lender then weights the interest payments in reverse order applying greater weight to the earlier months.
How do you calculate the Rule of 78?
The rule of 78 methodology calculates interest for the life of the loan, then allocates a portion of that interest to each month, using what is known as a reverse sum of digits. For example, if you had a 12-month loan, you would add the numbers 1 through 12 (1+2+3+4, etc.) which equals 78.
Is the rule of 78 legal?
There are rules governing when a lender can apply the Rule of 78. Federal law generally stipulates that in some cases — like mortgage refinances and other types of consumer loans with precalculated interest — lenders can’t apply the Rule of 78 to loans with repayment periods of longer than 61 months.
For what type of loan does the Rule of 78 apply?
Rule of 78s. Also known as the sum-of-the-digits method, the Rule of 78s is a term used in lending that refers to a method of yearly interest calculation. If the borrower pays off the loan early, this method maximizes the amount paid (interest paid) by applying funds to interest before principal.
What is the rule of 76?
The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. For example, the Rule of 72 states that $1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to $2.