Buying
Example Disclaimer. This example illustrates one application
of the method. The results shown here and the results in your situation
may differ. These differences occur for three reasons: (1) Laws
vary from state to state, (2) the computer programs used by lenders
differ, and (3) the contracts used by lenders differ. In the example,
the monthly interest is calculated as 1/12 of the annual interest.
Your finance agreement, even if it uses this method, may not work
like the one in this example. The example addresses the rebating
of interest only, not any other charges that may be included in
the loan. |
Example: Rule of 78 Method
| Amount financed |
$18,800.00 |
| Term | 48 months |
| APR |
9.00% |
| Monthly payment | $467.84 |
| First payment interest |
= |
$3,656.32 × (48 ÷ (1+2+3...48)) |
= |
$149.23 |
| First payment principal |
= |
$467.84 – $149.23 |
= |
$318.61 |
| End of month 1 net loan balance |
= |
$18,800.00 – $318.61 |
= |
$18,159.68 |
| Second payment interest |
= |
$3,656.32 × (47 ÷ (1+2+3...48)) |
= |
$146.13 |
| Second payment principal |
= |
$467.84 – $146.13 |
= |
$321.71 |
| End of month 2 net loan balance |
= |
$18,481.39 – $321.71 |
= |
$18,159.68 |
| Full-term interest |
= |
($467.84 × 48) – $18,800 |
= |
$3,656.32 |
Additional payments do not reduce the loan balance in the month paid. If an
additional $1,000 is paid at the end of the first month, it is treated
as prepayment of the monthly payments due at the end of months 2 and 3.
If the remaining payments are made on time or within the grace period,
there is no savings of the full-term projected interest because the amount
of interest in each payment is precomputed. If the loan is prepaid after
24 payments, the balance will be $54.81 higher than it would be under
the Constant Yield (Actuarial) method.
|