rule 78, can anyone explain

[essexboy]

hi

 

i believe my car loan was settled under rule 78, i am no expert but having paid of the agreement within 23 months of a 48 month loan my settlement figure was 500 pounds less than if it had run its entirety

 

it is my understanding rule 78 has been illegal since may 2005 so how do iprove this is/or could be the case

 

welcome will not provide me any details of rebates hiding behind the guise that they only act as a broker and why am i complaining after two years?

 

essexboy

[maroondevo52]

Hi,

 

I don't have a clue, but found this from January this year, it's a solicitors letter to First Plus...................................

 

 

 

While in the course of assessing the assets of the parties, our client brought to our attention your letter to him dated 07 January 2010 with its accompanying Settlement Quotation. We have also been handed a copy of your letter sent to both Mr and Mrs of 19 January 2010.

 

We note that your figures within the Settlement Quotation rely upon the “Rule of 78” method. You will be aware that although you say that this formula was devised by the Office of Fair Trading, they very much now frown upon this method of calculation being used. Indeed, many financial institutions (such as, for example, HFC Bank) have now ceased to use this calculation because it is acknowledged that it is no longer a fair method of calculating a rebate for an early settlement of a loan.

 

In the circumstances, we would ask you to confirm that as a reputable lender that you will, at least as from the 01 June 2010 when agreements not previously covered by the Consumer Credit (Early Settlement) Regulations 2004 are brought into line with these Regulations, agree to re-calculate a settlement employing a more reasonable method of calculation.

 

A settlement based upon a more modern actuarial basis will still enable you to receive a payment over and above the present capital settlement figure, but at the same time but which will also be fair to our client/your borrower.

 

We look forward to receiving confirmation that you are willing to do so. If you are not however prepared to agree, we would ask you to explain why, given the current financial climate and attitude towards this outdated and discredited method of calculation.

 

 

Regards.

 

Scott.

[essexboy]

thank you maroondevo52

 

will try and pursue this line of complaint and try and research rule 78 further as i believe you have only confirmed my concerns.

 

many thanks

 

essex

[Major Player]

essexboy thought you might find an explanation useful on the rule of 78 I thought that iy was not outlawed by the OFT until early 2007 but may be incorrect on that, I'll find out.

 

Also, broker or not, who got the money off you? If it was Welcome then it IS their problem!

 

The Rule of 78s deals with precomputed that has finance chargea calculated before the loan is made. The charges can be made up pf interest and insurances too. Once the finance charge has been identified, the Rule of 78s is used to calculate the amount of the finance charge to be rebated (forgiven) in the event that the loan is repaid early, prior to the agreed upon number of monthly payments. Its a rip off as borrowers not only owe the lender the principal amount borrowed, but the borrower owes the finance charge as well. If £10,000 is lent and the precomputed finance charge is £9,000, the borrower owes the lender £19,000 at the time the loan is made, whereas a simple interest borrower owes the lender only the £10,000 principal and monthly interest on the unpaid principal. Basically they get their interest paid up fromt so if you settle early you will pay back the full amount )Or as near as damn it) you borrowed plus whatever interest you haven't paid off. RIP OFF CENTRAL!

[ukaviator]

A standard loan is called "simple interest", you borrow some money and at the end of the period you pay it back plus interest. For longer term loans, you make periodic payments. With some consumer loans, especially with car loans, you may encounter a different type of loan which mentions the "Rule of 78". It is a different way of deciding how much of each monthly payment is interest and how much is principal.

 

If you don't terminate the loan early, simple interest loans and Rule of 78 loans will be equivalent. You will pay the same amount and get the interest rate quoted. However, if you pay off the loan early, you will end up paying more interest with a Rule of 78 loan than with the corresponding "simple interest" loan. For that reason, you should not take loans computed on the "Rule of 78".

 

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. 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.

 

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.

 

I hope i have not confused you with this, i haven't looked into rule 78 for some time.

[essexboy]

thanks ukaviator

 

this info has been great and dont worry i think i got the gis, couple o question though

 

you state

 

For that reason, you should not take loans computed on the "Rule of 78".

 

how would you know if rule 78 would be applied to your loan as most agreements only show interest to be applied over the total term of the loan and never mention that this rule may or may not apply

 

secondly can this still apply to recent settlementsas i was led to believe this was made illegal in 2005

 

thanks for your help

 

essexboy

[ukaviator]

Hi

 

Rule 78 applies to fixed sum loans taken out before 31st May 2005. Under rule 78 you pay more interest at the start of the loan, this may seem confusing as your monthly repayments will always be the same. It simply means at the beginning your repayments are used more for interest charges than the capital balance.

[essexboy]

thanks ukaviator

 

so i would be right in thinking any loan after that date that has had rule 78 applied to calculate the settlement figure would be iinproper

 

sorry to keep on

 

but just trying to get things clear in my head

 

essexboy

[essexboy]

bump

[essexboy]

bump

[ncf355]

EB,

 

you will be able to challenge this

 

I'm assuming (from rough calcs) that you took the loan out in Jan 2006(ish)?

 

 

THIS came into force 31st May 2005 and its quite freankly staggering that IF you took the loan out in 2006 they are trying to apply rule of 78

 

Though I have to say, for you to pay £500 less than if you went the full term it sounds unlikely they used 78

 

 

 

I believe the rough calculation is they are entitled to 1 months extra interest?

 

What APR was your agreement?

 

Can you give the total figures?

 

(amount borrowed, monthly payments, amount paid to settle at 23 of 4 8

Edited March 22, 2010 by ncf355

[pears23]

bump, would love to know too!

[essexboy]

hi

 

amount of credit for goods £5500-00

amount of credit for insurances £2423-91

total amount payable for the goods £8390-32

total amount payable for the insurances £3587-52

total payable £11977-84

 

deposit £150-00

 

payable by 48 monthly payments of 244-33

 

apr 24.5%

 

rate of interest on credit 12%

 

purchased car 26-01-2006 part exchanged 08-01-2008 paid weekly and paid £6282-24balance was ££544-60

 

settled at £4753-82 or £4746-76 depending which used vehicle order for you use

 

incidentley charged me £1000 for refinancing despite this being two seperate agreements and £229 for gardx i new nothing aboout

 

i have a form valueing the second car at 9452-00 from new

 

retail price 6737

 

trade price 5487

 

welcome charged me 9482 as a used motor 30 pound more than if i bought it from new

 

hope this helps

 

essexboy

[essexboy]

bump