I spend most of my day around brilliant people that is one of the perks of being a practicing attorney. However sometimes being around brilliant people all day long will cause you to forget that sometimes not everyone understands what you are talking about. I mentioned the rule of 78 to someone the other day and they did not know what I was talking about. In fact they informed me that most people probably do not know anything about the rule. So I am going to explain the rule of 78 for my readers so that you will know something that most people don’t know anything about. 

Your standard loan is called a “simple interest loan”. This is a loan where you borrow money and at the end of the loan period you pay it back with interest. Depending on the length of the loan you may make periodic payments. Some consumer loans you may encounter the “Rule of 78”. The Rule of 78 decides how much of your monthly payment is interest and how much is principal. 

If you don’t pay the loan off early, simple interest loans and Rule of 78 loans will be equal. The borrower will pay the same amount and get the interest rate that you were quoted. If you should pay the loan off early, you will end up paying more interest with Rule of 78 loans than with a simple interest loan.  

If you still don’t grasp the concept let me break it down further. The number 78 comes from the 12 months in a one year period. The sum of those parts (1+2+3+4+5+6+7+8+9+10+11+12) is 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 until we reach 1/78^th in the 12^th month. 

Well I just wanted to get a little intellectual with you guys. I’ll be back to my old self next week talking about neck bones and pig feet and anything else that will make you laugh!

In the words of my dad: “Stay away from the pig ears and fried pork chops.  Eat more fruits and vegetables.”