# Rule of 78

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# Rule of 78

A method of computing refunds of unearned finance charges on early payment of a loan so that the refund is proportional to the monthly unpaid balance.

The figure 78 is the sum of the digits of one to twelve—that is, the number of months in a one-year installment contract.

References in periodicals archive ?
The Rule of 78 can still be applied to existing loans.
For example, if a consumer had a pounds 10,000 loan which was being repaid over 15 years, but they decided to pay it off after only six years, the penalty would have been pounds 1,344 higher under the Rule of 78 than the new method.
The Rule of 78 - the name comes from adding up the 12 months in the year, starting by adding January (one) to February (two) and so on - was introduced in 1974.
If your loan is calculated on what's called the rule of 78, the interest is front-loaded so if you re-pay early, you end up being penalised, and the amount you will be charged to clear the loan is effectively the same as you would have paid in interest over the whole term.
Many lenders use a tricky calculation called the Rule of 78, by which they charge you part of the interest you'd have paid if you'd kept the loan running to its original end date.
The culprit is a complex calculation called the rule of 78 which loads most of the interest element of a loan on to the early repayments.
uk has a personal loan comparison calculator which allows you to select only lenders who don't charge an early redemption penalty but it doesn't weed out those who apply the Rule of 78.
The National Consumer Council welcomed the announcement, particularly the news the Rule of 78 was going to be scrapped.
The regulatory changes eliminated the use of Rule of 78 charges on early redemptions in favor of a sliding scale calculation as well as the removal of a dual-rate interest rate structure, which was replaced with a single-rate product.
And watch out for the Rule of 78, a sneaky device by which lenders levy most of the interest on a loan in the early months and heavily penalise early settlement.
These new programs replace those using the Rule of 78 as a method of calculating redemption and incorporate a new sliding scale redemption charge, already favorably received by our UK broker network.
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