![]() The result is that you pay more interest in the early months of your loan than you would with a simple-interest formula. On a 24-month loan, for instance, a lender would use the Rule of 300 to charge you 24/300 of your total interest charges in month one, 23/300 of the interest in month two and so on. ![]() Lenders can use this rule on loans of various terms. In the second month, you’d pay 11/78 of your total interest charges, and so on until you’re paying 1/78 of your total interest charges in the final month of your loan. During the first month of your loan, you would pay 12/78 of the loan’s total precomputed interest charges. Then, it would calculate interest as a fraction of 78, starting with 12 as the numerator and decreasing by one every month. A lender would add each digit within your 12-month term to get 78 (12 + 11 + 10 + 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 78). Let’s say you’re paying off a loan over 12 months. Because you’re paying a greater proportion of interest charges upfront, your savings won’t be as significant as they could be. ![]() However, the Rule of 78 can cut into your interest savings if you pay off your loan early. If you stick with your original repayment term, your costs of borrowing won’t be any higher than they would be with a simple-interest formula. The Rule of 78 does not lead to higher interest charges if you don’t pay off your loan ahead of schedule. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |