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Last year I got a home loan that follows the standard Rule of 78s amortization schedule. I can easily predict how much of my mortgage payment will go to interest and how much to principal.

A few months ago, I got an auto loan as well, but it doesn't follow any schedule at all! Here are the specifics:

  Loan Amount: $24,306
Interest rate: 7.49%
         Term: 36 months

According to Bankrate.com's calculator, my payment should be $755.96, but instead the bank is having me pay $757.62 each month.

The interest and principal portions also make no sense to me. Here's how my bank breaks them down:

Date         Interest  Principal  Total
08/01/2011   $209.58   $548.04    $757.62
09/01/2011   $151.28   $606.34    $757.62
10/03/2011   $152.00   $605.62    $757.62

Note that my interest payment in October was higher than September's!

I asked the bank about this, and they said my first payment was scheduled for August 1, but the loan closed 42 days prior to that, and the larger monthly payment ($757.62) is due to the accumulated interest during those 42 days.

As for the increasing interest, the bank said that October 1 was a Saturday, and so the payment was not withdrawn until October 3, and so I had to pay 2 extra days of interest, calculated by the simple interest formula.

That makes sense, I guess... But why must it be so complicated? Why doesn't my auto loan follow a standard amortization schedule like my mortgage does? Also, is there some formula or set of rules that explain exactly how the bank computed my monthly payment and interest?

Thanks!

  • Do they still follow rule of 78 ? Its illegal in quite a few European countries as this is not friendly for Customer and they get charged more incase of a part prepayments. – Dheer Oct 10 '11 at 8:56
  • What country are you in? I've had a dozen mortgaes by now, and never heard of rule of 78 for a mortgage. – JoeTaxpayer Oct 10 '11 at 15:07
  • I am in the U.S., but I think I misspoke when I mentioned Rule of 78. I just meant that my mortgage payments (as well as interest and payment proportions) match up perfectly with any amortization schedule I compare it to. My auto loan does not. – vocaro Oct 10 '11 at 16:32
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The bank is following the calculation method of daily reducing balance. This is usually good for customers as you are paying exactly for the number of days you are using the money. The calculations work out as:

Pyt Date   Opening   EMI     Int     Princ   Closing  
8/1/2011   24306.00  757.62  209.58  548.04  23757.96 -- Interest for 42 days  
9/1/2011   23757.96  757.62  151.28  606.34  23151.62 -- Interest for 31 days  
10/3/2011  23151.62  757.62  152     605.62  22546.00 -- Interest for 32 days  

Most mortgages also follow the daily reducing balance method.

Although it may look complicated, it's very easy these days to compute this with computers.

The Rule of 78 helped when one had to do stuff with pencil and paper. I am not sure about the U.S., but quite a few European counties have made the Rule of 78 illegal as this does not help the customer in case of partial prepayments.

  • 1
    In the United States, most mortgages treat each month as being equally long for purposes of calculating interest. (They do have special provisions for the first month, which are similar to the "Interest for 42 days" feature of the example.) – Jasper Dec 10 '17 at 6:43
  • Each month = 30 days, year = 360 days. Every year has Feb. 29 and 30, and 31st of month doesn't exist (as far as interest is concerned). – gnasher729 Sep 22 '18 at 15:59

protected by Chris W. Rea Sep 21 '18 at 23:49

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