The Rule of 78 might sound like an obscure maths trick, but for Australians taking out personal loans, car finance, or even some business loans, it’s a formula that can mean paying much more interest than you’d expect—especially if you repay early. As 2025 brings new transparency standards and consumer protections, understanding this old-school lending method is more important than ever.
What Is the Rule of 78?
The Rule of 78 is a loan interest calculation method that weights interest charges heavily toward the early months of the loan. Instead of spreading interest evenly across each repayment, lenders using the Rule of 78 collect a larger share of the total interest up front, leaving less principal paid off in the first year. It’s most commonly seen in personal loans, car finance, and sometimes small business loans.
Here’s a simplified breakdown:
- The total of the digits for a 12-month loan is 78 (12+11+10…+1).
- Each payment’s interest portion is based on the reverse order of the months—so the first month gets 12/78 of the total interest, the second gets 11/78, and so on.
- If you repay early, you don’t save as much on interest as you would with a standard reducing-balance loan.
Example: On a $20,000 car loan with $2,400 total interest over 3 years, the first year’s repayments could cover over 60% of the total interest, even though you’ve only paid a third of the loan.
2025 Policy Updates: Where Does the Rule of 78 Stand in Australia?
The Rule of 78 is less common in Australia than it once was, thanks to regulatory pressure and consumer advocacy. As of 2025, most major banks and lenders have shifted toward reducing-balance or simple interest methods. However, some non-bank lenders and car finance providers still use it, especially for fixed-rate or precomputed loans.
- ASIC scrutiny: The Australian Securities and Investments Commission (ASIC) continues to review unfair contract terms, including interest calculation methods. In 2025, increased disclosure requirements mean lenders must explain how interest is calculated up front.
- Consumer Data Right (CDR): Open banking reforms make it easier for borrowers to compare loan offers, but the Rule of 78 can still lurk in the fine print.
- Car finance spotlight: Several car finance providers still use the Rule of 78 for fixed-term contracts. If you’re planning to pay out a car loan early, check the contract for “precomputed interest” or “Rule of 78” language.
Key takeaway: In 2025, most new mainstream loans don’t use the Rule of 78, but it hasn’t vanished—especially in car and small business finance.
Real-World Impact: Why Borrowers Should Care
The Rule of 78 makes a big difference if you plan to pay your loan off ahead of schedule. Here’s how:
- Early repayment costs more: Because most interest is paid up front, settling your loan early won’t save as much as you’d expect. You could pay hundreds—sometimes thousands—more in interest compared to a reducing-balance loan.
- Less principal paid off early: Your early payments mostly cover interest, so your remaining balance shrinks slowly at first.
- Less flexibility: If you refinance or upgrade your car in a few years, you could be hit with a higher-than-expected payout figure.
Case study: Sarah takes a $15,000 car loan over 3 years at 8% interest. She plans to upgrade after 18 months. With a reducing-balance loan, she’d owe about $8,000. With Rule of 78, her payout could be closer to $9,000—wiping out much of her early repayment savings.
How to Protect Yourself in 2025
- Always ask your lender how interest is calculated—look for “reducing balance” or “simple interest.”
- Read the contract for phrases like “precomputed interest” or “Rule of 78.”
- Use a reputable loan comparison site to check the true cost of early repayment.
- If you plan to pay off a loan early, consider lenders who explicitly reject the Rule of 78.
Regulatory reforms in 2025 make it easier to spot these traps, but the responsibility still lies with borrowers to know what they’re signing.
The Bottom Line
The Rule of 78 is fading, but it hasn’t disappeared from the Australian lending scene—especially for car and business loans. With greater transparency and a borrower-friendly regulatory environment in 2025, Australians have more power to avoid costly interest structures. Before you sign any loan, make sure you’re not being short-changed by the Rule of 78.
