Rule of 78s When an installment loan is repaid early,

Chapter 11, Problem 11.1.222

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Rule of 78s When an installment loan is repaid early, there is a second method for calculating unearned interest called the rule of 78s. Although rarely used today, the following formula can be used to calculate unearned interest: u = f # k1k + 12 n1n + 12 where u is the unearned interest, f is the original finance charge, k is the number of remaining monthly payments (excluding the current payment), and n is the original number of payments. Joscelyn Jarrett obtained a new sport utility vehicle that had a cash price of $35,000 by paying 15% down and financing the balance with a 60-month fixed installment loan. The APR on the loan was 8.5%. Before making the 24th payment, Joscelyn decides to pay off the loan. a) Determine the original finance charge on the 60-month loan. b) Determine Joscelyns monthly payment. c) If the actuarial method is used, determine the amount of interest Joscelyn will save by paying the loan off early. d) If the rule of 78s is used, determine the amount of interest Joscelyn will save by paying the loan off early.