Personal Finance Term
Rule of 78
A method some lenders use to work out how much interest you still owe if you settle a fixed-rate loan early. It front-loads interest to the earlier months, so paying off such a loan early saves you less than you might expect.
Under the Rule of 78, the total interest on a loan is allocated more heavily to the early part of the term, meaning that in the first months you are paying off proportionally more interest and less principal. As a result, if you settle a flat-rate hire purchase or personal loan ahead of schedule, the rebate on unearned interest is smaller than a simple straight-line calculation would suggest, and you may still owe a large chunk of the original interest.
This matters most for Malaysian car loans and similar flat-rate hire purchase agreements, where early settlement is common. The practical effect is that paying off a Rule of 78 loan early does save money, but not as much as you might hope, so it is worth asking the lender for the exact early settlement amount rather than assuming. Knowing the loan uses this method also helps you weigh whether to settle early or keep the loan running.