Explain the method of computing the amount of interest

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Question: The Rule of 78s is a commonly used method of computing the amount of interest when the balance of a loan is repaid in advance. Adding the numbers representing 12 months gives

1 + 2 + 3 + 4 + 5 +···+ 11 + 12 = 78

If a 12-month loan is repaid at the end of one month, for example, the interest the borrower would be charged is 12/78 of the year's interest. If the loan is repaid at the end of 2 months, the total interest charged would be (12 +11)/78, or 23/78 of the year's interest. After 11 months the interest charge would therefore be 77/78 of the total year's interest.

Reference no: EM132157844

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