Rule of 78 [Finance] Law and Legal Definition

Rule of 78 is a method of yearly interest calculation. The Rule of 78 weights earlier payments with more interest than later ones. It is used for computing the amount of interest a borrower saves by paying off a loan early, when the interest payments are higher at the beginning of the loan period. The rule is based on the assumption that the borrower pays only the amount due each month. If the borrower pays off the loan early, this method maximizes the amount paid by applying funds to interest before principal. This is also known as the rule of the sum of the digits.