Rule Of 78
Definition of 'Rule Of 78'A method of allocating the interest charge on a loan across its payment periods. Under the Rule of 78, periods are weighted by comparing their numerical values to the sum of all the digits of the periods. The weights are applied in reverse, applying large weights to early periods. |
|
Investopedia explains 'Rule Of 78'When paying off a loan, the repayments consist of two parts: the principal and the interest charge. The Rule of 78 weights earlier payments with more interest than later ones. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal. However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying more interest overall.This method of allocating interest was commonplace in loans for consumer goods, such as automobiles. However, the U.S. government has outlawed the use of the Rule of 78 for loans longer than five years. This is largely because this method penalizes borrowers who pay off debts early. |
Related Definitions
Articles Of Interest
-
Understanding The Time Value Of Money
Find out why time really is money by learning to calculate present and future value. -
New Wheels: Lease Or Buy?
These two major ways to obtain a car have very different advantages and drawbacks. Find out which is best for you. -
Getting A Loan Without Your Parents
Use the 5 "W"s to finance your dreams without banking on a second signature. -
Payday Loans Don't Pay
Hold too tightly to this rescue line and you'll soon be drowning in debt. -
How Line of Credit Works
A line of credit is an arrangement where a bank offers a maximum loan amount that the borrower can draw upon at any time. The borrower – which can be an individual, business or government ... -
6 Tips For Selling Your Home Fast
Find out what you can do to stand out from the competition and make your home an easy sell. -
5 Smart Ways To Use Your Tax Return
This year, find out how to stretch your tax refund further to strengthen your future. -
Debunking 10 Budget Myths
Don't let these excuses prevent you from reaching your financial goals. -
Outfox The Debt Collector's Hounds
Dealing with a collection agency is scary if you don't know your rights. We help you take back the power. -
Common Liabilities That Hurt Your Net Worth
Every penny that you keep out of the liability side of the net worth equation essentially ends up on the asset side.
Free Annual Reports