# Rule of 78

Search Dictionary

## Definition of 'Rule of 78'

The Rule of 78 is a method of calculating the interest on an installment loan. It is based on the assumption that each payment is applied first to the interest and then to the principal. The interest rate is applied to the unpaid balance at the beginning of each period. The Rule of 78 is also known as the sum-of-the-digits method or the diminishing balance method.

To calculate the interest using the Rule of 78, you first need to find the sum of the digits from 1 to the number of payments. For example, if there are 6 payments, the sum of the digits is 1 + 2 + 3 + 4 + 5 + 6 = 21. Then, you divide the interest by the sum of the digits. For example, if the interest is \$100 and there are 6 payments, you divide \$100 by 21 to get \$4.76 per payment. Finally, you multiply the interest per payment by the number of payments remaining to find the total interest. For example, if there are 5 payments remaining, you multiply \$4.76 by 5 to get \$23.80 in interest.

The Rule of 78 is not as accurate as other methods of calculating interest, such as the actuarial method. However, it is simpler to use and can be a good approximation of the interest on an installment loan.

The Rule of 78 can also be used to calculate the payoff amount of an installment loan. To do this, you first need to find the sum of the digits from 1 to the number of payments. Then, you multiply the sum of the digits by the interest rate. Finally, you subtract this amount from the loan amount to find the payoff amount.

The Rule of 78 is a useful tool for calculating the interest and payoff amount of an installment loan. However, it is important to note that it is not as accurate as other methods of calculating interest.

Do you have a trading or investing definition for our dictionary? Click the Create Definition link to add your own definition. You will earn 150 bonus reputation points for each definition that is accepted.

Is this definition wrong? Let us know by posting to the forum and we will correct it.