This preview shows pages 13. to view the full 22 pages of the document.
Refinancing A Loan – The Sum of Digits
Method (section 5.4)
There are still a few Canadian lending
institutions that use the sumofdigits
method (also called the “Rule of 78”) when
determining the outstanding balance on a
loan
•
this method is an approximation to the
amortization method
•
the main difference is that we determine
the interest portion of each payment by
taking a defined proportion of the total
interest paid on the loan
Only pages 13 are available for preview. Some parts have been intentionally blurred.
Method
Original Loan = A
Term of loan = n  periods
Interest rate on loan = i
Thus,
Periodic payment, R =
in
a
A

Define
1. I = total interest paid on loan = nR − A
2. sum of digits 1 to n, sn =
Only pages 13 are available for preview. Some parts have been intentionally blurred.
The interest paid column looks like:
k R I
k
P
k
B
k
0    A
1 R
I
s
n
I
n
=
1
2 R
I
s
n
I
n
−
=1
2
: : :
k R
I
s
kn
I
n
k
+−
=1
: : :
n −1
R
I
s
I
n
n
=
−
2
1
n R
I
s
I
n
n
=1
0
total
nR I = nR − A A
You're Reading a Preview
Unlock to view full version