Planning to buy a car or already paying car installment?

**Well this is what you should know about your car loan!**Apart from accounting/finance/bank folks, most of us may not know**Rule of 78**.

**Rule of 78**is the allocation of interest charge

on a loan throughout its payment periods.

It is commonly used to calculate the interest rebate or redemption sum (early settlement).

**Rule of 78****applies in Hire Purchase Loan**or more commonly known as**car loan**.##
Let's start with the **Rule of 78**!

As usual, giving example is the best illustration.

**Example 1**

__Assumptions:__Hire Purchase Loan/Car Loan = 25,000

Repayment Period = 1 year = 12 months

Interest Rate = 3% p.a

**Yes, it is a direct calculation for the interest of car loan:**

25,000 X 1 X 3% = 750

**Hence, total car loan will be principal + interest:**

25,000 + 750 = 25,750

**So, monthly installment will be:**

25,750 / 12 = 2,146

**But, do you know what's the proportion that paid to interest?**

This is where

**Rule of 78**comes into the picture!

###
**Which explains why it is call Rule of 78!**

**1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78**

Of course, usually the repayment period would not be that short.

The above case is just to show the "

**78**" in

**Rule of 78**.

So next, same car, but with longer repayment period, let's say 7 years!

**Example 2**

**Again, it is a direct calculation for the interest of car loan:**

25,000 X 7 X 3% = 5,250

**Hence, total car loan will be principal + interest:**

25,000 + 5,250 = 30,250

**So, monthly installment will be:**

30,250 / 84 = 360

In this case, there's no longer the number 78 in

**Rule of 78**!

But calculation still the same, except with 7 years or 84 months you will get 3570.

**So how to get 3,570?**

###
So the interest trend in **Rule of 78**:

**The amount of interest is highest in the beginning**

**and reduces over the loan period.**

**While principal increases throughout the period.**

__How does it affects me?__Well, it doesn't affect

**unless**you are going for

**early settlement or repayment**.

**Hence, it is important to know which debt to settle first when you got a lump sum.**

Subsequently, you could also check with your financial planner!

**Looking for a financial planner? Contact me!**

Thanks for sharing this, it is great~ =)

ReplyDeleteWell if you think it is great, then you should share it out to your friends as well! ;)

DeleteThank you for letting us know how to calculate car loan as I still consider to purchase a new car but did not how the loan been calculate.a useful information.

ReplyDeletewell if you need help, you could always email me or pm me! ;)

DeleteExpert on calculations.. Well, guess we really need to consider the interest if we really wanna purchase the car..

ReplyDeleteYup of course we have to! ;)

DeleteGood and informative post. You explain good calculation process.

ReplyDeleteThank you! Share it out to your friends too!

DeleteThank you for sharing such great information. It was very informative and has help me in finding out more detail about Car Loan!

ReplyDeleteThank you for sharing. It is informative and I’m searching more details on car loans to know more about this field and want to understand the basics of banking services too.

ReplyDeleteI was looking for a formula to calculate Car Loan but most of the links took me to a calculator page. Appreciate the post. The simplest formula to calculate car loan is Total Interest = [Interest rate/100]*Total Loan Amount*Total Loan Tenure (years)

ReplyDeleteThank you for sharing such great information.

ReplyDeleteIt is informative, can you help me in finding out more detail on

house loan interest.

Thanks for sharing this Information. Here is some information about Payday Loans Online Same Day, you can apply now and you will be saving so much time which will be a waste had you applied to any conventional bank.

ReplyDelete