The amount of interest to be paid per payment is calculated as follows. When you know the Total Interest through the calculations above, you can calculate interest rebate using Rule of 78's.įirst, you need the Sum of the number of payments.įor instance, if the Term is 12 monthly payments, the summation of 12 payments isġ + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78 In the formula, 1 + the Interest Rate(R/n) is multiplied by itself as many This is the number of periods per year multiplied by the NT = Term, the total number of payments in the loan schedule. N = number of compound payments per year.
(The formulas are repeated below but you will have to refer to the aforementioned Interest is calculated as described in the topicĪmortized Loan - Normal. Here is how the Rule of 78's is applied to a Amortized loan. "sum of digits" because it gets its name from summing the digits 1 through 12 - the number of months in a one year Interest early in the loan period and less later, compared to other methods. When lenders use the Rule of 78's, they distribute the total finance charge over all payments, but charge more Our balance is also calculated the same way as before, where we subtract that period’s payment towards principal.Enter A New Debtor Search For Records Group Debtors And Accounts Ungroup Debtors In A Single Group Ungroup All Debtors In Your Database Use Simple Interest Use Revolving Compound Interest Use Amortized Loan - Normal Interest Use The Rule Of 78 Interest Use Variable Interest Accrue Interest Periodically Close A Debtor Renumber Debtor File Numbers Use Judgements In Collect! Hide Tabs On Debtor Screen Use Archiving Setup Account Matching The second month’s interest is calculated as follows:Īnd our principal for the second period will be calculated the exact same way as before, where we simply subtract that period’s interest from the payment. The work is calculated exactly the same as the first month’s interest, yet the principal remaining is the previous balance of the loan.
In the second period, since you only have $97,457.81 remaining to pay off, the interest portion of the second month’s payment will be $97,457.81 (the previous balance of the loan) times the interest rate for the period. As I mentioned before, the interest each period will change as the balance of the loan changes. In every row, our payment will be $3,042.19.Īs with our calculations, the next thing we need to work on is interest. Ok, so how do we fill in the rest? One thing is easy to fill in, which is the “Payment” column, since the payment will not change. Now that we have all our values for the first line, we can begin to fill in our table. For our first period, the previous balance of the loan is the total balance. What you pay towards interest does not affect the balance of the loan. The balance of the loan after a period’s payment is the previous balance of the loan less the portion of the payment made towards principal. The last part, which I haven’t discussed yet, is how the balance changes. We are almost done with our first period’s calculations. Next, we need to calculate the portion paid towards the principal, which is just the total payment less interest. The portion paid towards interest will change each period, since the balance of the loan will change each period, but I will dig into that in just a bit. The portion of the payment paid towards interest is $500 in the first period. We will use our formula above, and the work is shown below for the first month: Now, we need to calculate how much of that is paid towards interest each month. So, each month, your total payment will be $3,042.19. We will use the formula above, where the present value of the loan is $100,000, the interest rate per period is 0.06/12 since we are working with monthly payments, and our number of payments is 36, which is twelve payments per year for three years. We can start with each month’s “Payment” calculation. You could add other columns, like cumulative principal payments made, and cumulative interest paid, but this is up to you.Īlright, now we have to actually fill in the table. Here, we can see how much we pay towards principal and interest each period, the total payment each period, and the remaining balance.
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