Rule of 78s Calculator

Formula

The formula to calculate the interest allocation for each payment period using the Rule of 78s is:

\[ I = \frac{2 \cdot (N - P + 1) \cdot T}{N \cdot (N + 1)} \]

Where:

$I$ is the interest for the payment period ($)
$N$ is the total number of payment periods
$P$ is the current payment period
$T$ is the total interest over the life of the loan ($)

What is the Rule of 78s?

The Rule of 78s is a method of allocating the interest charge on a loan across its payment periods. It is often used in short-term loans of 1 year or less and is named after the sum of the digits 1 through 12 (which equals 78). This method front-loads the interest payments, meaning the borrower pays more interest in the early stages of the loan and less in the later stages. This can be disadvantageous for borrowers who want to pay off their loan early.

Example Calculation

Let's assume the following values:

Total Number of Payment Periods (N) = 12
Current Payment Period (P) = 3
Total Interest over the Life of the Loan (T) = $1200

Using the formula:

\[ I = \frac{2 \cdot (12 - 3 + 1) \cdot 1200}{12 \cdot (12 + 1)} = \frac{2 \cdot 10 \cdot 1200}{12 \cdot 13} \approx \frac{24000}{156} \approx 153.85 \]

The interest for the current payment period is approximately $153.85.