# Calculating the Rule of 78s: Add-Ons and Simple December 14, 2012

December 14, 2012

The Rule of 78s is a method for amortizing an amount of interest which has been pre-computed over the life of the loan and dividing that interest over the payments of that loan.

A Rule of 78s loan employs a method of allocating the interest charge on a loan across its payment periods. As we all know, when paying off a loan, the repayments consist of two parts: the principal and the interest charge. The number 78 is derived from the 12 months in a one-year period. The sum of those parts (1 + 2 + 3 + 4 ... + 12) equals 78. Thus, for a one-year loan 12/78ths of the interest is considered earned in month one, 11/78ths in month two and so on down to 1/78th in month twelve.

### Difference Between Rule of 78s and Simple

In brief, the Rule of 78 weights earlier payments with more interest than later ones. If the loan is not terminated or prepaid early, the total interest paid between simple interest and the Rule of 78 will be equal. However, because the Rule of 78 weights the earlier payments with more interest than a simple interest method, paying off a loan early will result in the borrower paying more interest overall. Here is an example of calculations between simple interest and Rule of 78's.