Rule of 78s

Also known as the sum-of-the-digits method, the Rule of 78s is a term used in lending that refers to a method of yearly interest calculation. The name comes from the total number of months' interest that is being calculated in a year (the first month is 1 month's interest, whereas the second month contains 2 months' interest, etc.). This is an accurate interest model only based on the assumption that the borrower pays only the amount due each month. If the borrower pays off the loan early, this method maximizes the amount paid (interest paid) by applying funds to interest before principal. In other words, in comparison to a simple interest loan, a rule of 78s loan will charge more interest if the loan is paid early. Also known as the sum-of-the-digits method, the Rule of 78s is a term used in lending that refers to a method of yearly interest calculation. The name comes from the total number of months' interest that is being calculated in a year (the first month is 1 month's interest, whereas the second month contains 2 months' interest, etc.). This is an accurate interest model only based on the assumption that the borrower pays only the amount due each month. If the borrower pays off the loan early, this method maximizes the amount paid (interest paid) by applying funds to interest before principal. In other words, in comparison to a simple interest loan, a rule of 78s loan will charge more interest if the loan is paid early.