Using the Rule of 78, find the amount of unearned interest for the loan paid in full before the date of maturity. Round to the nearest cent.
-Finance charge: $9,325
Total number of payments: 61
Remaining number of payments, when paid in full: 35

Question

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The Rule of 78 is a method used to calculate rebates or unearned interest for prepaying a loan which assumes that the borrower's payments are distributed in a way that the interest charges are heavier early in the repayment period.

To find the unearned interest amount, we need to first calculate the total amount of interest that would have been charged over the life of the loan. The formula for the total interest charged under the Rule of 78 is:

Total interest = (Finance charge * (n^2 - n))/ (N^2 + N)

where n is the remaining number of payments, N is the total number of payments, and the finance charge is the total amount of interest charged for the loan.

Substituting the values given in the problem, we get:

Total interest = (9325 * (35^2 - 35))/ (61^2 + 61) = $19,988.31

Next, we need to calculate the unearned interest amount using the Rule of 78. The formula for unearned interest under the Rule of 78 is:

Unearned interest = (Total interest * (n*(n+1)))/ (N*(N+1))

Substituting the values given in the problem, we get:

Unearned interest = (19988.31 * (35*(35+1)))/ (61*(61+1)) = $3,106.69

Therefore, the answer is C, $3,106.69.

Using the Rule of 78, Find the Amount of Unearned