Sheila borrowed $1,000.00 for 1 year. Her monthly payments are $89.60. If she decides to pay the loan off after 4 months, find the amount of interest that she will save. (Use the rule of 78s.)

Question

Quizplus · Accepted Answer

The rule of 78s is used to calculate interest savings when a loan is paid off early. The sum of the digits for a 12-month loan is 78. The interest for the first 4 months is calculated as (12+11+10+9)/78 of the total interest. The remaining interest is saved. The total interest paid over 12 months is $75.20 (12 payments of $89.60 minus the principal of $1,000). The interest saved by paying off after 4 months is $75.20 - (42/78 * $75.20) = $34.71.

Sheila Borrowed $1,000