What is Rule 78?

At Jade Truck Loans, we are as committed to educating and informing our customers as we are on sourcing cheap truck loan rates. The lending sector does have some complex issues and aspects which can be confusing. As finance professionals we understand! We also understand that the more our customers know and understand about loans and finance, the more confident informed they are to move forward with finance decisions and work towards growing their business.

In our educational series of articles, our objective is to inform. This information is not designed to replace the expert financial advice you should seek from your financial advisor regarding your individual circumstance. But we hope it will answer some of your questions.

One of the questions which is often asked – What is Rule 78?

We’ve taken a very deep dive into accounting and attempted to provide this explanation in as simple to understand terms as possible. Again, this information is for general purposes!

Rule 78 – ATO Ruling

Rule 78, also known as the Rule of 78 and Rule of 78s, refers to a method that some lenders use to calculate the interest charged on fixed term commercial loans, such as truck loans and truck finance.

It is detailed by the Australian Taxation Office (ATO) under Taxation Ruling TR 93/16. This Ruling considers when it is appropriate to use the Rule of 78 in apportioning instalments for fixed term loans. It does not include consideration of the tax deductibility of the interest. If the Rule of 78 is applied, it must be done consistently over the term of the loan.

Under the ATO Ruling, there are some types of loans where the Rule of 78 does not apply.

To read the full detail on Rule 78 from the ATO

Methods for Calculating Interest

Before explaining the Rule of 78 in detail, you should be aware that it is not the only method of calculating interest.

Here’s a few basics:

  • Yes you will be advised by your Jade Truck Loans consultant the cheapest truck loan interest rate that we source for your truck loan.
  • However, the interest can be apportioned over the life of the loan in different ways.
  • The total interest paid on the loan will be the same regardless of the method used.
  • At what stage of the loan, ie in which repayment months, the interest is apportioned, may impact your tax return in regard to tax deductibility of the interest portion of the loan.
  • How interest is apportioned over the term of the loan may impact the ‘pay out’ amount if you pay out the loan early.

There are 3 commonly used methods of calculating interest are and understanding the differences between the methods is perhaps the simplest way to understand Rule 78.

  • The Actuarial Method: for each instalment (repayment) the balance is multiplied by the interest rate. As such, the interest part of each repayment decreases over the term of the loan and more of the principal is repaid with each repayment.
  • The Flat Rate Method: the total interest payable on the loan is equally apportioned across the number of repayments. The interest part of each repayment is constant but the principal payable is being reduced with each payment.
  • The Rule of 78: the interest is apportioned over the term of a loan using an arithmetic progression. (How it derives its name is quite complex so we’ll skip that!) Read on….

Rule of 78 Explainer

In as simple terms as we can muster, the Rule of 78 uses an arithmetic progression which apportions a greater amount of interest to the earlier repayments. By using this method, the borrower is paying a greater proportion of the total interest on their loan earlier in the loan term.

  • As such, the principal, or loan amount, is being reduced at a slower rate.
  • A greater part of your earlier repayments are being offset against the interest rather than the principal.
  • If you continue all your repayments through to the final payment and agreed balloon or residual, the outcome should be the same for all accounting methods.
  • If you choose to finalise your loan early, you may find that more is owing than expected if the lender uses the Rule of 78 because for the early repayments you have been paying more interest than principal.
  • Some lenders may provide loan statements which show how much interest and principal has been paid and is still owing.

Why it matters

The way the lender calculates and apportions your interest over the term of the loan, may impact the amount you are permitted as tax deductions if the interest only and not the entire repayment is tax deductible. The method may also impact the pay out if you intend to pay out your truck loan before the end of the loan term. Calculate Truck Loan Repayments to get a clearer picture of how these factors could influence your financial situation.

We said it was complicated, but at Jade Truck Loans we accept a challenge. No matter how complicated. Even for customers with no docs or low docs, we work hard to source a great truck loan.

To discuss a cheap truck loan to get your business moving, contact Jade Tuck Loans 1300 000 003 and talk with our consultants.