Rule of 78

Rule of 78 is an old and complicated mathematics calculation used by financial institutions to rip car buyers who take up car loan. If one decided to do an early settlement (i.e., sell car). Most country including USA have banned such practice but local Bank Association is still not at it as the profit too good. For example, if you take a loan of 10 years, and you decide to redeem it (sell that car) after 1 year, under this rule of 78, you still need to pay them about 85% (estimated) of the interests.

An Example Loan :

Bank Loan for a new car $60,000 
Interest 2.5% p.a., Total interests payable : 2.5% x $60k x 10 years = $15,000.00 
Redemption at year 1 : 85% of interests = $12,750.00 
Need to pay: $60,000 - 6,000 +  12,750 = $66,750.00

Value of the one-year old car (based on straight line depreciation) is about $54,000.00

The earlier your settle your loan, it is not going to benefit you. In Singapore, almost all LENDERS uses rule of 78, so it is not going to make any difference who you go to.

As a rule, once you take up the loan, the earlier you settle your loan, the more money you loose.

Updated On: 11.12.27