when paying off a loan the repayments are composed of two parts the principal and the interest charged the rule of 78 weights the earlier payments with more interest than the later payments if the loan is not terminated or prepaid early the total interest paid between simple interest and the rule of 78 will be equal 
however because the rule of 78 weights the earlier payments with more interest than a simple interest method paying off a loan early will result in the borrower paying slightly more interest overall in 1992 the legislation made this type of financing illegal for loans in the united states with a duration of greater than 61 months certain states have adopted more stringent restrictions for loans less than 61 months in duration while some states have outlawed the practice completely for any loan duration check with your state s attorney general s office prior to entering into a loan agreement with a rule of 78 provision if you are unsure the difference in savings from early prepayment on a rule of 78 loan versus a simple interest loan is not significantly substantial in the case of shorter term loans for example a borrower with a two year 10 000 loan at a 5 fixed rate would pay total interest of 529 13 over the entire loan cycle for both a rule of 78 and a simple interest loan in the first month of the rule of 78 loan the borrower would pay 42 33 in the first month of a simple interest loan the interest is calculated as a percent of the outstanding principal and the borrower would pay 41 67 a borrower who would like to pay the loan off after 12 months would be required to pay 5 124 71 for the simple interest loan and 5 126 98 for the rule of 78 loan 