Rule of 78


According to LoanStreet – The Rule of 78 is one of the most prevalent secrets in the banking industry that is barely understood by the public. This post is about me trying to understand how it works, and hoping to share with you so that you understand and be able to figure out how you can apply it to your financial decision.

Since I got to banking I am in a learning mode. Learning how the banking system work. Being a self-professed technical person, I will try to understand things in a more technical way. Whether for good or bad.

The situation now is that I am buying a new car and deciding how many years should I take up the loan. And since I am not yet eligible for staff loan yet, I need to resort to a conventional loan from other local banks that offer Hire Purchase. So in order to calculate this – I need to understand how the settlement works. Well – fact of the matter the settlement is done by returning back to you the interest that was charge. Do understand that for typical hire purchase here is the formula:


So what this mean is that the interest are charge up front when you take the loan,

Formula (Example).jpg

Question is now, when you terminate your loan, how do you calculate the interest that will be returned? Well – generally its calculated by “Rule of 78”. What this rule essentially says, the borrower will be paying greater part of the interest during the initial part of the loan. I.e, more interest are apportion during the first year versus in the later years. Note that this is different from the “Daily Rest” or “Monthly Rest” types loan in which the interest are always calculated based on the outstanding balance prorated to the period.

Example “Daily Rest”, the interest rate is divided by 365 days and then applied daily based on the outstanding amount that the borrower has. This should be better because as one pay earlier, the outstanding amount will be less and therefore the knocking off the principal amount is faster. Note that when you pay, interest will be the first to be paid before the principal. Principal is the original loan amount. So if one is smart, you will be able to “game the system” and able to pay less interest if you know when to pay your loan.

Back to Rule of 78. So the question is how do you calculate the weightage? Lets take an example above, 5 years loan. A lender would make a sum of all the months:


So basically what happened is this, the way the interest is calculated is in reverse. I.e. interest for the first month is based on the assumptions above:

interest calc.jpg

Which make it quite interesting because if the weightage of the interest is fair, then the total interest that will be refunded will be a lot less if you were to settle earlier.

So what I did in order to calculate how long is my loan duration is for me to plot a table of the settlement price versus the depreciation of the car and eye ball for a sweet point in which I am willing to sell off the car. I will explain that in another post. But I hope you do get what I mean by Rule of 78.

You may think that this may not seem fair for the borrower, but you need to understand that for a bank, each of the loan has a lot of cost thats associated to it. From creating the infrastructure to manage the balances to hiring sales people to push the loans. And thus they need to be able to make money out of the lending that they do to their customers.

I hope the post is somewhat beneficial. Remember please do read the terms and conditions of your hire purchase or loans and see if Rule of 78 applies. They may not say specifically that they use Rule of 78, but you can see that the calculation is similar.

rule of 78.jpg

Taken from here  Maybank. Link may not work… 🙂

Note; I am not a financial advisor therefore I am not responsible for any inaccuracy of the information posted here. Please do your own research and consult professionals if you need any advice regarding your financials. I wrote this post to poke my readers curious minds 🙂

Looking for a new place

Fun Posts

I have been a resident of my current place for more than 14 years. Probably bordering 15 years. Honestly this place in Damansara Perdana is super awesome. There were times that I felt I needed to move out but after a while that feeling just dies off. Partly because I am so comfortable.
There are quite a number of reasons why I needed to move out:
The condo is falling apart. Seriously there are cracks that I don’t want to see.

  1. The lift is perpetually hanging on its lifeline. One out of three lifts are dead.
  2. The parking is way too low for my defender.
  3. A highway is coming up in front of my house. Gosh.

For item 3 – there have been a lot of news about DASH – which is the highway that will cut thru from Damansara Perdana all the way to Shah Alam. As much as I hate the fact that they are building a highway in front of my current house, but I recognise that this a fact of life in development will continue forever and ever.


I have narrowed down a few options but I am not sure yet. From areas perspective – probably in the region of Damansara Heights or Kenny Hills. Damn atas I must say. Didn’t quite like Mont Kiara because it’s too congested to my knowledge. I do have a lot of friends who stays there and I supposed they got used to it. Now it takes me about 30 mins to get to office from home in the morning and in the evening. If I do stay in Mont Kiara, it probably going to take me much longer (lol).
Buying a new property is not something that can be taken lightly. I have not bought any property to stay in a long time, and I guess this time I need to do properly. I don’t mind buying a second hand property because by doing that I know that the property mechanics is something that is manageable. Well – for apartment especially, a new apartment may be nice, but in actual fact staying in a less populated apartment may be a bit daunting. I still remember when I was staying in my apartment for the first time. Being one of the few tenants that actually moved in after receiving the key, it was very creepy!

Seriously. Then again, an old apartment will have its own fair share of issue. The things that I spoke about like dying lifts, cracked walls and who knows burst pipes. Lets see, I have so many things to consider.

Here are my view or criteria or my next place:
1. It needs to be closer to the city (where I work)
2. It needs to have a balcony at the living room
3. It needs to be bigger than where I am staying (lol)
4. It needs to have a bigger kitchen
5. It needs to be able to fit a big dining table

Seems like I just want something bigger. Well I think I just want something in which I can entertain people. I do enjoy cooking and all, but having a small place is very prohibitive in getting people to come over to my place to have a nice dinner. If I can fit a dining table for 10-12 will be awesome. Not to the extent of parties and such, but just a nice evening with family and friends to come over.

Of course my criteria will mean that it will be an expensive affair, but sometimes you need to spend money on your place because you spend more time in your place than in your office (this is true for my new job). I will still ponder. Anyway – I do have about 6 months to work thru the details and choose the place of my liking before I am able to buy. I am really looking forward to tap on my staff loan where the rates are pretty good. Much better than commercial rates out there. Lets see.

Till next week 🙂