Enter the total number of payment periods, current payment period, and total interest over the life of the loan into the calculator to determine the interest for the payment period.
Rule of 78S Formula
The following formula is used to calculate the interest allocation for each payment period using the Rule of 78s.
I = (2 * (N - P + 1) * T) / (N * (N + 1))
Variables:
- I is the interest for the payment period ($)
- N is the total number of payment periods
- P is the current payment period
- T is the total interest over the life of the loan ($)
To calculate the interest for a specific payment period, first subtract the current payment period from the total number of payment periods and add 1. Multiply this result by 2 and then by the total interest over the life of the loan. Divide this result by the product of the total number of payment periods and the total number of payment periods plus 1. This will give the interest for the current payment period.
What is a Rule of 78S?
The Rule of 78s is a method of allocating the interest charge on a loan across its payment periods. It’s 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.
How to Calculate Rule of 78S?
The following steps outline how to calculate the Rule Of 78S:
- First, determine the total number of payment periods (N).
- Next, determine the current payment period (P).
- Next, determine the total interest over the life of the loan (T) in dollars.
- Next, use the formula: I = (2 * (N – P + 1) * T) / (N * (N + 1)).
- Finally, calculate the interest for the payment period (I).
- After inserting the variables and calculating the result, check your answer with the calculator above.
Example Problem:
Use the following variables as an example problem to test your knowledge.
Total number of payment periods (N) = 12
Current payment period (P) = 5
Total interest over the life of the loan (T) = 500
