What Is The Rule Of 78 And How Does It Work?: Supreme Guide
What Is The Rule Of 78 And How Does It Work?: Supreme Guide
Abstract
About Rule Of 78 When you take any loan the lender will charge interest on the amount that you have borrowed. What Is The Rule Of 78? Rule of 78 is a financial calculation method to pre-calculate the interest rate on a loan that favors the lender over the borrower on short-term loans. The lenders were able to apply this rule for any loans in 1992 the rule was outlawed in the country for any loans more than sixty-one months and several states outlawed it completely. The lenders use this rule to make a profit on the interest rate early in the loan cycle where the interest amount is weighted higher than the later part of the loan cycle. Once the sum of months is done, the lender will then weigh the interest rates in reverse order to make sure the maximum interest amount is collected from the borrower in the earlier loan cycle. So the first month's interest would be calculated as 12/78 of the total interest, for the second month it would be 11/78, the third month 10/78, and so on till the twelfth month where it would be 1/78. Even if the borrower decides to pre-pay the loan, the lender will still cover most of the interest amount that is charged over the tenure of the loan. You may want to compare the same loan with a simple interest calculation to see the difference in savings on your interest amount if you are planning to pay off your loan early.
