Rule Of 78

Method of computing interest-refund on a fixed installment loan (with add on interest) that is paid-off before its full duration (maturity). A refund is necessitated because, on such loans, interest is not paid uniformly but forms a larger percentage of the installment in the early months than in the later months. Therefore, a pre-paying borrower would have already paid more interest than required. To determines how much interest was paid in each month: (1) add up the number of the digits of the months of the loan period; for example, if this period is one year, the total number is 78 (1+2+3+ …

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