The first step in using the rule of 78s is to add up all the digits for the number of payments initially scheduled to be made under a loan.
As a form of prepayment penalty the rule of 78s assigns more interest to early payments than does the simple interest approach.
Mathematician Karl Friedrich Gauss (1777-1855) used a summing method to simplify the summing of a sequence of digits, providing the equation: Sum of digits = n(n + l)/2, familiar to accountants and used in the sum of the years' digits depreciation method and for the Rule of 78s
interest recognition method.
Taxpayers currently accounting for stated interest on short-term consumer loans under the Rule of 78s
method may automatically change to the constant yield method under the general automatic method change procedures of Rev.
In 1983, an IRS revenue ruling disallowed the rule of 78s
on any amount exceeding the economic accrual of interest.
Yet we received only thirteen complaints by consumers about various problems in refinancing loans (five related to problems in getting a pay-off amount and only three related to the adequacy of cost information), three complaints about prepayment penalties, and no specific complaints about the Rule of 78s
Rule Of 78s
Month Cumulative Interest Payments Simple Interest Rule Of 78s
1 $ 15.