Rule 78 and Paying off Loan Early

Ginnser

Hi Everyone,

Firstly just to say I have found this website amazing eye opener !

I have a Loan with RBS, I have the money to pay the loan off now and was surprised to be told that it would not be of any advantage to pay if off early as interest is calculated using Rule 78, therfore the interest is calculated up front.

Has anyone got a way of beating this Rule 78 ?

Cheers

Ginnser

DiggingOut

Unfortunately, about the only way to beat it is to learn from it and never ever take out such a loan again. And to tell the lenders that you aren't taking their loan because of it.

I think the government is taking a look at these provisions.

mrtickle

Has anyone got a way of beating this Rule 78 ?

You can beat it but you have to pay it off very early to do so. Last Dec I took out a 3 year loan for my car, after Northern Rock turned me down I had to resort to Lombard Direct - this annoyed me as I hated their adverts in the late 90s with the baby sitting on a squeaky boat, the "oh yeah, I must get that loan" and the stupid talking telephone, and had resolved never to use them. But I had run out of time so went with them.

My loan is for £6244 over 36 months at 7%, at £192.29 per month. There is a 2-month redemption penalty if I pay it off early, plus it uses the rule of 78. Last month I did some number crunching to see how much I would save (compared to the loan's total interest of £678.44) based on transferring the debt it to a card with a lower interest rate, or paying it off/transferring to a 0% card - at various different times. Results are:


card rate Apr 2004 Jun 2004 Aug 2004 Mar 2005
settle on date 0.00% £375.89 £321.92 £271.99 £129.37
unknown - test 1.00% £218.92 £181.65 £147.70 £54.50
unknown - test 2.00% £56.39 £36.75 £19.60 -£22.18
breakeven for Aug 2004 2.15% £31.51 £14.61 £0.04 -£33.84
unknown - test 3.00% -£111.92 -£112.93 -£112.56 -£100.69
Capital One Platinum 3.90% -£268.72 -£252.27 -£235.25 -£172.95
Texaco 3.90% -£268.72 -£252.27 -£235.25 -£172.95
Mint (online only) 4.90% -£449.23 -£412.15 -£375.70 -£255.05
An expensive card 6.00% -£655.60 -£594.53 -£535.58 -£347.82
Same rate as loan 7.00% -£850.75 -£766.56 -£686.00 -£434.32


So the longer I leave it the less I'll save. If I'm transferring it, I can't save anything unless I can get a rate of 2% or less! If I had the money to pay it off in full early, I could save money but I have to be quick - I'd guess August-ish 2005 is the last date I could possibly break even. After that I'd lose money by paying off early. Also transferring it at the higher rates (even below 7%) the later I transfer, the less I lose (bottom row of table).