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 a method of calculating the interest rebate a borrower receives if they pay off a loan early. The total interest saved by paying off after 4 months can be calculated by assigning weights to each month (from 12 down to 1), summing these weights, and then determining the proportion of the total interest that corresponds to the remaining period. For a 12-month loan, the sum of the weights is 78 (12+11+...+1). If Sheila pays off after 4 months, she has 8 months' worth of interest weights remaining (9+8+7+6+5+4+3+2+1 = 45). The interest for the entire period is calculated from the total payments minus the principal ($89.60*12 - $1000 = $75.20). The interest saved is the proportion of the total interest corresponding to the remaining 8 months: ($75.20 * 45) / 78 = $34.71.

Sheila Borrowed $1,000