RULE 78 : Which lenders use it?

I thought I had explained how it came about.
The borrower signs a legally binding contract.
He then wishes to break that contract and redeem the loan.
Generally you are not allowed to break a contract.
In this case an exception is made and you are allowed to break the contract.
This is unfair to the other party to the contract.
The compromise solution is that the borrower is let off part of the interest he would have paid if he had fullfilled the contract.
The amount of the interest rebated is calculated in accordance with the Rule of 78 which is enshrined in the Consumer Credit Act of 1974.


If we take an extreme case:-
A borrower borrows  £10,000 on day one.
Suppose the lender does not advertise directly to the public.
The lender uses a broker.
The lender pays the broker an introducers fee
e.g.  £ 1,000 for producing the borrower who applied for the £10,000 loan.
The lender already is £1,000 down.
Suppose the borrower wants to repay, what was originally a 10 year loan, after one year.
How should the lender determine how much the borrower must pay to close the loan.
THe law tells him how to do it.
Use Rule of 78.
In the current climate politicians may say that the rule of 78 is extortionate.
IT IS THEIR RULE of 78.
I wonder if it will go soon.
Don't hold your breath ... it might though.
THe subprime lenders get a bad press.
Deservedly so in many cases.
They are however the lenders who lend where it is almost folly to do so.
They are often the last resort of desperate people.

We had a classic thread the other day where someone ask "Why won't any company give my mate a credit card ...
we then got some details of "my mate".
I  suggested to the poster that he got a second CC himself that his mate could use. "Not likely" was the reply.

There can be no information as to when or even if it will be abolished
There is a consultation process going on at present and I think ends on or about 26 Oct 2004.
Until this day arguements for the abolition, alteration and retention of Rule of 78 may be made.
It must be kept in mind that a fixed rate loan over a period of years is a CONTRACT.
Ceasing to pay the instalments on the loan is a Breech of Contract.
Normally, i.e. with a building society, ( remember them ... no share holders ... caring ... listening to their members  ... the good guys ... no fat cats ...   blah   blah   blah ...  Once there were several thousand ... Now there are only 61 left I think.) they EVICT  you from your home sometimes for not making your payments.
If you are lucky (Hmmm) a  Knight in Shining Armour in the shape of a Secondary or Non Status Lender comes to the rescue.   You are offered a second mortgage at a higher rate than the first mortgage.  You sign a contract.  You stay in your home.   The house value goes up in time.  When it does your original Building Society might be prepared to lend you loads of money.
You would like to pay off the treacherous Knight in Shining Armour who saved your bacon and get back into the bed of the lender who would have kicked you out in the first place.  The Consumer Credit Act of 1975  took account of  the arguements of the secondary lenders which I have satirised here and came up with a compromise.  It gave a bit to the borrower i.e.  Yes they could breech the contract and save money by so doing.  They gave a bit to the lender i.e.  Yes they would get some recouperation of their "Set Up Costs".
The Consumer Credit Act has been amended from time to time over the past thirty years.  It will probably be amended yet again following the current round of consultations.  Then again it might not.  If it is amended I guess we will see a phrase like "For loan agreements entered into on or after X ( where X is some date in the future ) the following changes will be made.  The changes will have no impact on loans already in pace.