Show that the Rule of 78 charges Interest higher in the begining and reduces over the...

Show that the Rule of 78 charges Interest higher in the begining and reduces over the life of the loan with the following data: (Hint: add up months to arrive at the monthly ratio)
                        Loan: $ 10,000
                        Interest rate: 5%
                        Duration: 1 year

Expert Solution

Given in the problem			Calculation
Loan Amount		$10,000	Year	EMI	Interest	Principal	Remaining Balance
Interest		5%	1	$856	$42	$814	$9,186
Repayment Mode		Yearly	2	$856	$38	$818	$8,368
No of Years		1	3	$856	$35	$821	$7,547
			4	$856	$31	$825	$6,722
Convert to monthly			5	$856	$28	$828	$5,894
Interest rate	5%/12	0.417%	6	$856	$25	$832	$5,062
Months		12	7	$856	$21	$835	$4,227
			8	$856	$18	$838	$3,389
			9	$856	$14	$842	$2,547
			10	$856	$11	$845	$1,702
			11	$856	$7	$849	$853
			12	$856	$4	$853	($0)

Answer Monthly interest 1st month $42 and 12 month is $4
Hence Rule of 78 charges Interest higher in the beginning and reduces over the life of the is correct

Formula

jeff jeffy answered 2 years ago

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