 TITLE: What Is a Precomputed Interest Loan? CONTENT: How the Rule of 78 Impacts Your Loan\n------------------------------------\nTechnically, lenders aren't supposed to be able to charge interest that hasn't yet accrued, which is why you can save a lot on interest if you pay off a loan with a simple interest rate earlier than was originally agreed.\nWith precomputed loans, lenders use the Rule of 78 to calculate how much interest is earned on a loan with a 12-month term. The rule gets its name from the sum of adding up all the numbers of months in a year, one through 12.\nWith this rule, the lender can assign each month a share of the total interest owed, but in the reverse order. For example, if you have a 12-month personal loan with precomputed interest, the lender earns 12\/78 of the interest during the first month, 11\/78 of the interest during the second month and so on.\nThe same principle applies to longer-term loans as well, so if you have a 24-month loan, you'd add all the digits up from one to 24 to get 300. When interest is applied, 24\/300 of the total interest will apply the first month and so on.\nAs a result, if you pay off the loan very quickly, you may still get some interest savings because the lender didn't earn all of the interest it charged upfront. But those savings disappear fast because most of the interest is considered to be earned early on.\nThe Rule of 78 is controversial, and the U.S. government doesn't allow it on loans with a repayment term longer than 61 months. What's more, many states have banned the rule entirely. END