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Personal Loans Rule 78 Guide

This applies to fixed-sum loans taken out before 31 May 2005 and are regulated by the Consumer Credit Act 1974.

Rule of 78 is a way in which some lenders will calculate early repayment costs.

It works out how much interest you should have paid at any time during the repayment period of a loan. Its main feature is that the interest is not spread evenly over the payments during the term of the loan. Under rule of 78 you pay more interest in the beginning of a loan and as each repayment is the same size, the part paying off the capital is smaller in the beginning of the loan increasing over time.

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The number 78 is based on the 12 months of a one-year period. When the 12 months are added together (12+11+10+9+8+7+6+5+4+3+2+1) you get 78. This means that if you have a loan to be repaid in one-year, the lender will expects you to pay 12/78ths of the interest in the first month and 11/78ths in the second, continuing like this until the final month.

If the loan is paid off early, the lender may use the rule of 78 to determine how much interest you do not have to pay. In many cases, due to the interest element being larger in the repayments at the beginning of the loan, a large amount of capital can remain to be repaid.

Early settlement penalty

This applies to fixed-sum loans taken on or after 31 May 2005 and that are regulated by the Consumer Credit Act 1974.

If the loan is paid off early, the lender may charge a penalty (subject to a set formula) of 30 days or 1 calendar month. This applies when the original loan term is more than 1 year and the advance is £25,000 or less. For terms of 1 year or less, no redemption penalty is payable.

This penalty is set out in the rules governing repaying loans early and is covered by the Consumer Credit (Early Settlement) Regulations 2004.