Rule of 78

How Rule of 78 works

The Rule of 78 is complex, and it isn't necessary to know how it works. What's really important is that if you have a Rule of 78 loan, and you pay it off early, there will be more left to repay than you think.

The following is a technical description of the Rule of 78, which is currently used to govern how interest is assigned on personal loans.

WARNING! FOR MONEY SAVING NERDS ONLY

Calculate the total interest.

Calculate the total amount of interest payable over the life of the loan.

Assign each month its reverse number.

Take the number of months and assign it in reverse order to each month you're due to pay off. (e.g. over two years. The first month is month 24, the second month 23, the third month 22 etc.).

Calculate interest in proportion

The amount of interest assigned per month is worked out by dividing that number (e.g. for fourth month over two years it's 21) by the total of all these numbers (i.e. 24+23+22+21……+3+2+1=300). So in this example 21/300th of the total amount of interest. Told you it was complicated didn't I!

P.S.It's called the Rule of 78 because if you work out the total of all the months in one year – it adds up to 78