Business and Personal Finance Dictionary
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
- RULE OF 78
If lenders front-load the interest they charge on a short-term loan, you pay most of the interest before you begin to make substantial repayment of principal. For example, on a one-year loan, youd pay 15% of the interest in the first month, 14% in the second month, and only 1% in the last month. The practice, called the rule of 78, guarantees the lenders profits if you pay off your loan before the end of its term. Its called 78 because thats the sum of the twelve payments in a one-year loan ( 1+2+3++12 = 78). Its illegal to calculate loans with terms longer than 61 months using the rule of 78 and a number of states outlaw the practice for all loans. But where the rule of 78 is used, the loans may be described as precomputed or precalculated loans, or as loans that offer a rebate of finance charge if you prepay.Back