help with "rule of 78" loan calculation?

Martinslovechild

When you borrow a sum of money from a bank or other lender, you usually arrange to repay the loan with a fixed interest rate by a specific date in a set number of equal installments. The rule of 78 is one way in which lenders calculate how much interest you should have paid at any stage during the repayment period of a fixed rate installment loan.

Where does "78" come from? The number derives from the 12 monthly parts of a one-year period. The sum of those parts (12+11+10+9+8+7+6+5+4+3+2+1) is 78. Thus, for a loan with a one-year duration, the lender expects you to pay 12/78ths of the interest in month one, 11/78ths in month two and so on down to 1/78th in month twelve.

The rule of 78 takes into consideration the fact that you pay more interest in the beginning of a loan when you have the use of more of the money and you pay less interest as the debt is reduced. Because each repayment installment is the same size, the part going to pay off the amount borrowed increases over time and the part representing interest decreases.

Should you decide to repay a loan early, the lending institution will use the rule of 78 to determine how much interest you do not have to pay. However, you may be unpleasantly surprised by how much of the capital sum of your loan remains outstanding.

The key point is that the interest you are charged on the sum you have borrowed is NOT spread evenly over the number of payments you have agree to make. Thus in the early period of your loan's life span you have been paying more interest and less capital, reducing the outstanding amount more slowly than you may have assumed.

BenL

If you type rule of 78 into a search engine there is a link that comes up for a university in America that has a calculator.

Put in your details and it will get it pretty much right.

Ben

pstones578

Anyone know of any calculators that will do rule of 78 sums? I have a £10,000 loan that I have been paying off at £198.76 a month at 7.4% and am wondering when I will be able to clear it. I am saving up and when the amount of savings is the same as my settlement value then I will clear the loan but I'm struggling to work out when that will be and the loan company can't(wont?) help me work it out.

I think when I had made 8 payments my settlement valuwe was 9046.53 and when I had made 10 payments my settlement value was 8949.83 if that helps anyone?

Any help much appreciated!

mountainofdebt

This should explain it far better than I ever could!

http://www.fla.org.uk/fla_home/Consumer_Guidance/REPAYING.pdf

savvy

Hi pstones578
I have moved your thread here to aid you, and others who search for this subject. A link has also been included in the Quick Links section at the top of the board.
Thanks
savvy

molar

Hello,

can you show me how to apply the formula to calculate the settlement figure for a loan with protection?

Here are the details:

Amount borrowed. £4000
Insurance premium £1052
Total credit was £5052 (05/07/04)
APR 8%
Term is 61 months
Repayments started after 2 months(01/09/04).

There will be 59 repayments of £103.80 consisting of a main loan payment £82.18 and insurance loan payment of £21.62.

Total amount payable 59*103.80 = £6124.20
Total interest 6124.20-5052 = £1072.20.

I asked the loan provider how much of a rebate I would get for removing loan protector. £870.

I really need to get the loan refinanced as I reckon its costing me £1500 (:mad:) more than it should. I don't need loan protector in the future.

Thanks.

Wardy7

Hi,
first time posting in the "Loan" section so hello!
I'm after a bit of help that I'm sure is a doddle to you guys in here.
I'm after knowing the sum that is used to figure loan repayments out. I've used a few of the loan calculators online and they give me one answer but I just can't seem to figure it out myself on the calculator.

For example, say I have a loan for £3000 over 12 months and the rate is at 10% then I figure it out that I'd end up paying £3300 back, but the loan calculators figure it out as £3165 (with monthly payment of £263.75)

Can anyoen give me some simple sums so I can use them to work it out myself instead of having to come online to do it

Cheers
Wardy

Rafter

Wardy,

You have assumed that you are paying 10% interest on the full £3000 whereas in fact you will be paying back the loan all the time so the amount you have borrowed, and therefore the interest you are paying, goes down over time.

A 'quick and dirty' way of doing it is to take the loan amount, divide it by 2 (to get the average loan.

Multiply that number by the apr and the number of years you are borrowing for to give the total interest.

Add the loan and interest together and divide by number of payments to work out the monthly payment!

Using your example above:

£3000/2 = £1500 average loan

£1500 x 10% = £150 interest

£3000+£150 = £3150/12 = £262.5

If you want to get it more accurate still and have access to Excel you can use the following function:

=PMT(((1+10.47%)^(1/12)-1),12,3000,0,0) = 263.75

The first bit is to convert the annual rate to the monthly rate, then the number of periods, then the loan amount.

I have solved it for you and worked out that the actual rate on the loan seems to be about 10.47% to arrive at that payment amount. The banks are fairly smart at using tricks to publish the lowest APR possible but use rounding to actually charge you a bit more!

Bet you wish you had never asked!

R.

savvy

Hi Wardy7

I have moved your thread here as this is a similar thread. You may also find further useful information here.

Thanks
savvy

Suffol

Hi

New to forum, but came across this useful tool for download from Office for Fair Trading, which works out both Rule of 78 early settlement figures, and also the New 1month+1 rule for loans taken out since May 1st. It's a legit tool....A bit difficult to work out how to use, but there's online help and I got there in the end with my own calculations. Hope it's useful.

http://www.crw.gov.uk/DualCalc/

Chris