Rule of 78s

A mathematical formula that was devised in the days before modern calculators. The formula was a quick way for lenders in the 1920s and 1930s to estimate payoff amounts when a customer paid ahead on an installment loan. Some auto lenders still use the "Rule of 78s" formula to calculate a rebate of finance charges when a customer pays off a pre-computed loan early. For a borrower looking to end an auto loan early, there isn't a worse way a lender could calculate your payoff amount. The Rule of 78s formula packs extra interest charges into the early months of a loan. Using Rule of 78s, a lender typically collects three-quarters of a loan's interest in the first half of a loan term. The Rule of 78s can only be applied to pre-computed loans that are paid ahead of schedule. The formula cannot be applied to simple interest loans.

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