How it works
The rule of 78s is a precomputed-interest accounting method that allocates a loan's entire finance charge across its months in proportion to the sum of digits — hence the name: for a 12-month loan the weights sum to 78. Month one absorbs 12/78ths of the interest, month two 11/78ths, and so on, which loads interest dramatically to the front of the contract. That matters only when the loan ends early: the borrower who pays off ahead of schedule is owed a rebate of unearned interest, and the 78s formula rebates less than honest simple-interest accounting would. This calculator quantifies that exposure exactly. Enter the amount financed, the total finance charge printed on the contract, the term and the payments already made; it returns the payoff demanded under 78s, the actuarial payoff at the implied APR, the dollar penalty between them, and how much of the finance charge the lender has already booked. The mechanics reward early scrutiny: settling a 60-month contract after 18 payments has already booked just over half the finance charge in 30% of the time. US rules now restrict the method to contracts of 61 months or shorter, but short precomputed subprime loans still carry it, and the penalty is legal precisely where borrowers can least afford it.
Formula
Rebate = charge × [m(m+1)/2] ÷ [N(N+1)/2], m = months remaining | 78s payoff = financed + charge − paid − rebate
Tips
- Search your contract for 'precomputed' or 'rule of 78s' before planning any payoff.
- The earlier you exit, the bigger the penalty — waiting rarely reduces the damage much.
- Ask for the actuarial payoff in writing; long loans entitle you to it by law.
- Avoid precomputed contracts entirely when a simple-interest loan is available.
- Refinancing out of a 78s contract triggers the same rebate math — price it first.
Frequently asked questions
- How does the rule of 78s penalize early payoff?
- It front-loads interest: after 18 of 60 months, just over half the finance charge is already booked. Paying off then, the 78s rebate refunds only the unearned tail — leaving a payoff roughly $50–$300 above the simple-interest figure on a $20,000 loan, with larger gaps on pricier charges and earlier exits.
- Is the rule of 78s still legal?
- In the US it is banned for consumer loans longer than 61 months and restricted elsewhere, following federal action in the early 1990s. It survives on short-term precomputed contracts — exactly the small-dollar, higher-risk segment where the front-loaded penalty bites hardest. Always read the contract's rebate clause.
- How do I calculate my rule of 78s rebate?
- Compute the sum of digits for remaining months divided by the sum for the full term, times the finance charge. After 18 of 60 months, remaining weights total 903 against 1,830, so a $3,200 charge rebates about $1,579 — versus roughly $1,625 owed under simple-interest accounting at the implied 6% APR.
- Why did lenders use the rule of 78s at all?
- Precomputation predates cheap computing: quoting one flat 'amount financed plus charge' simplified servicing and let lenders book income early. The method also quietly protected against early defaults. Simple-interest amortization delivers the same revenue honestly, which is why modern regulated lending has largely abandoned 78s.
- Can I avoid the rule of 78s penalty after signing?
- Partly. Request the official actuarial payoff — on terms beyond 61 months it is your legal entitlement, and even on eligible short contracts servicers will quote both figures if asked. Timing matters too: penalties shrink as the schedule matures, so weighing 'pay off now versus in four months' occasionally favors patience.