Rule of 78 Imposed on Early Settlement of Loans

Rule of 78 Imposed on Early Settlement of Loans

Pre-calculated interest charges levied under Rule 78 ensure that a lender receives its share of the profits. It is also more difficult (if not impossible) for borrowers to benefit from interest savings that could otherwise be realized by paying off a loan earlier. Towards the end of the 2019 quarter, I requested a settlement amount so that I could cash out the outstanding amount, but the bank did not respond. I even asked my personal banker for help and still haven`t gotten an answer. When the Movement Control Ordinance (MCO) was imposed in March, I did not comply with my request. However, as soon as some of the MCO restrictions were lifted in June, I contacted the bank and received the bank`s “HP/IP settlement confirmation” on June 29. The Rule of 78 is a method of calculating and applying interest to a loan that allocates more of the interest costs to repayments of previous loans. The name of the plan is based on a repayment period of 12 months, which was common when the rule was created. It adds the integers between 1 and 12 months, which is equivalent to 78.

However, the rule can be applied to any repayment period. Sunday, 12 Jul 2020 l 10:00 AM MYTI writes to highlight something very important for consumers, especially hire purchase borrowers. I recently had an unpleasant experience when dealing with the early settlement of such a loan from a local bank. That`s not to say you should never pay off your loans sooner. It really makes more financial sense sometimes. But the only way to know for sure is to calculate for yourself how much money you`ll actually save (or lose) if you pay off a loan early. Keep in mind that lenders who still use the Rule of 78 want to make as much money as legally possible by financing your loan. Even if you don`t intend to pay off your loan early, it`s still a good idea to understand how the interest on your loan is calculated in case you change your repayment strategy in the middle of your term. As you can see, the rule of 78 conditions the loan with more interest in advance. If you pay your loan according to the original repayment schedule, the Rule of 78 and the simple interest method would cost the same total amount. However, if you try to pay off your loan earlier by making additional payments, that extra money will be applied to future payments and interest, according to Rule 78.

It`s not good news if you`re trying to get out of debt faster and save money in the process. In 2014, a letter from a consumer organisation published by The Star pointed out that the banking sector`s Rule of 78 for small loans is recognised as an unfair practice – “it has been abolished in the UK since 2005” (“Stop using Rule 78 for loans, banks urge”). I am surprised that an issue so important to borrowers and consumers, without the authorities acting, could have disappeared from the public`s radar. It appears that this rule allows banks to allocate pre-calculated interest charges that they prefer to borrowers for short-term loans or when a loan is prepaid. The 78 methodology rule adds extra weight to the months of a loan`s previous cycle, so more of the interest is paid earlier. The Rule 78 methodology adds weight to the months of a loan`s previous cycle. It is often used by short-term installment lenders who make loans to subprime borrowers. In 1992, legislation made this type of financing illegal for loans with a maturity of more than 61 months in the United States.

Some states have imposed stricter restrictions on loans with a term of less than 61 months, while others have banned the practice altogether for each loan term. Check with your state`s attorney general`s office before entering into a loan agreement with a Rule 78 provision if you`re unsure. Some will say that this is a commercial transaction and that if a borrower is willing to take out the loan, he is deemed to accept the application of Rule 78. I strongly disagree with that, because I should have the right to be informed by the bank of these unfair rules and practices and have the right to decide on them. This was never communicated to me and, like any reasonable consumer, I had correctly concluded that any discount granted for early settlement would be based on the fixed interest rate per annum, in this case 2.86%, which is equivalent to RM 1,615.90 per annum. The 78 loan interest method rule is more complex than a simple low APR (LPA) loan. However, with both types of loans, the borrower pays the same amount of interest on the loan if they make payments for the entire loan cycle without prepayment. As it was a gift, I chose the longest hire-purchase period – nine years – with a clear emphasis that I might want to pay it earlier and expect a discount on the annual interest rate for early settlement. The head of the bank assured me that this was standard practice. The Rule of 78 can easily thwart your prepayment plans for an installment loan, so avoid loans that use this method if you can. Fortunately, even in cases where its use would still be legal, the rule of 78 has largely gone out of fashion. You probably don`t have to worry unless you`re a subprime borrower looking for a car loan that lasts 60 months or less.

I am writing to highlight something that is very important to consumers, especially hire purchase borrowers. I recently had an unpleasant experience when dealing with the early settlement of such a loan from a local bank. The silver lining of the experience on the horizon is that I managed to gain knowledge about how we could have been deceived by the financial industry without our knowledge. This new “wisdom” that I have gained refers to the “Rule of 78.” The Rule of 78 gives the months of the first part of a borrower`s credit cycle greater weight in calculating interest, which increases profit for the lender. This type of interest calculation plan is mainly used for fixed-rate non-revolving loans. The Rule of 78 is an important consideration for borrowers who may intend to prepay their loans. The rule of 78 may still be used by some lenders, but not much. It is widely seen as unfair to borrowers who may decide to repay their loans early to get out of debt.

Borrowers pay more with the Rule of 78 than with simple interest. When repaying a loan, repayments consist of two parts: the principal and the interest charged. The Rule of 78 weights past payments with more interest than later payments. If the loan is not terminated or prepaid, the total interest paid between simple interest and the Rule of 78 is the same. However, since the Rule of 78 weights previous payments with more interest than a simple interest method, prepaying a loan causes the borrower to pay slightly more interest overall. Fortunately, beginning in 1992, the Rule of 78 was banned nationwide for loans with terms longer than 61 months, although it may not apply in all states, regardless of the term of the loan.