Introduction to Rule of 78

The Rule of 78 is a method used by lenders to calculate interest on a loan. It gives greater weight to months in the earlier part of a borrower’s loan cycle when calculating interest, which increases the profit for the lender.

The Rule of 78 (R78) is a sum-of-the-digits method, summing up of the digits one through 12 - the number of months in a year =78 as a basis for profit accrual distribution . R78 is a method regardless of the finance tenor if it is exactly one year loan with 12 instalments. For applying Rule 78, the total interest collected from the customer is pre-calculated using the Fixed profit rate or fixed interest rate and distributes the interest over the loan life according to the R78 calculation. The interest portion charged for the prior month is much higher than the later one. By using R78, if customer does not terminate the finance before maturity, the interest amount calculated by using flat rate and Rule of 78 finance is equivalent.

Customers can pay the same amount in total. However, if customers pay off the finance early, they end up paying more than the flat rate method.

It is possible to configure and use Rule78 arrangements for both Profit bearing and upfront profit arrangements (Murabaha).