Rule of 78

From Wikicpa

Some consumer loans calculate interest by the "Rule of 78" or "Sum of digits" method. Seventy-eight is the sum of the numbers 1 through 12, inclusive. And the practice enabled quick calculations of interest in the pre-computer days. In a loan with interest calculated per the Rule of 78, the total interest over the life of the loan is calculated as either simple or compound interest and amounts to the same as either of the above methods. Payments remain constant over the life of the loan; however, payments are allocated to interest in progressively smaller amounts. In a one-year loan, in the first month, 12/78 of all interest owed over the life of the loan is due; in the second month, 11/78; progressing to the twelfth month where only 1/78 of all interest is due. The practical effect of the Rule of 78 is to make early pay-offs of term loans more expensive. Approximately 3/4 of all interest due on a one year loan is collected by the sixth month, and pay-off of the principal then will cause the effective interest rate to be much higher than than the APY used to calculate the payments.