Quote:
Originally Posted by kuvesh
Can someone explain to me rule of 78?
This is some sort of prepayment penalty right?
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Kuvesh, this is quite straightforward - banks will impose a 20% penalty on forgone/unearned interest due to early settlement.
Upon full settlement, bank takes 20% of outstanding interest, for e.g. 2K, based on 20% of $10,000. This penalty is usually more severe in the earlier parts of the loan and due to the loan structure (i.e. more interest rather than principal repayment).