Motley Fool: The Cost Of Early Repayment
November 14th, 2006 | POSTED BY ROB
May 2005 saw the demise of the infamous ‘Rule of 78′. And a jolly good job too. It was a most iniquitous method used by lenders to calculate the cost of redemption penalties for loans and payment protection policies.
Up to that time, the interest on loans or insurance premiums were usually ‘front-loaded’ and the way it worked was very similar to a repayment mortgage. In the early days of a loan, most of your monthly payments were used to pay the interest and insurance premiums rather than the loan itself. So, if you redeemed it early, you often found that you owed nearly as much as you did when you first took it out….
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