Question

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

Answer 1

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