Rule of 78s
: A method of allocating interest charges for the life of a loan to the periods within the loan.
Rule of 78s. Also known as the "sum of the digits," this is a formula that was initially devised in the days before modern calculators as an easy way for lenders to estimate payoff amounts when installment loans were paid off early.
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.
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.
Rule of 78s
. 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.
During this period, Price applied the "rule of 78s
," which allocates greater interest in the early years of a debt relative to later years.
The bill also would add a new section to the Truth in Lending Act to require "prompt" refund of unearned finance charges and insurance premiums when any consumer credit transaction is prepaid; prohibit the use of the "Rule of 78s
" method for calculating the amount of finance charges to be rebated in prepayments of precomputed loans, and instead require the use of the actuarial method or another method that is as favorable to the consumer; and require that a disclosure of the amount due on any precomputed loan be provided on the consumer's request.
Rule Of 78s
Month Cumulative Interest Payments Simple Interest Rule Of 78s
1 $ 15.00 $ 15.41 2 28.85 29.53 3 41.53 42.38 4 53.03 53.93 5 63.32 64.21 6 72.40 73.19 7 80.23 80.90 8 86.81 87.32 9 92.11 92.46 10 96.12 96.31 11 98.81 98.88 12 100.16 100.16 For a Rule of 78s
calculator see: http://www.