Rule of 78: a comparison of loan amortization.

The National Public Accountant | March 1, 1994| | Copyright

The payment of a debt in equal future installments is an application of present value of an ordinary annuity. The amount of each installment includes interest and principal. Theoretically, the interest portion of each payment should be based on the unpaid principal balance. Every accountant should have learned this fact in their Principles of Accounting class.

However, in constructing a debt payment schedule, many financial institutions do not employ the unpaid principal balance approach. Instead, the rule-of-78 method is used. The rule-of-78 method is actually the ...

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