Rule of the Sum of the Digits [Finance] Law and Legal Definition

Rule of the Sum of the Digits is a method of allocating the interest charge on a loan across its payment periods. This rule weights earlier payments with more interest than later ones. This method of allocating interest was commonly used in loans for consumer goods, such as automobiles. However, the U.S. government has outlawed the use of the Rule of 78 for loans longer than five years. This is largely because this method penalizes borrowers who pay off debts early.