Rule of 78s Definition

The rule of 78s, also known as the sum-of-the-digits method, is a method of calculating yearly interest on an annual loan. The name is derived from the number of months’ interest on a one year loan that compounds monthly. For example, the first month has one month’s interest while the second month has two months’ interest (the first plus the second)-thus, 1 + 2 + 3 + 4 + … + 12 = 78.

The rule of 78s can be used to discover the interest on loans where the finance charges are calculated before the loan is actually made (and are fully incurred even if the loan is paid off early). In practice, computers have rendered the rule of 78s obsolescent.