To calculate interest for early repayment of bank loans, determine the applicable method specified in the loan agreement. Most loans use either the Rule of 78 (also known as the "front-end loading" method) or simple interest. Under the Rule of 78, interest is precomputed based on the total loan term. If repaid early, the borrower pays a reduced interest amount proportional to the days remaining. For simple interest, interest accrues daily from the disbursement date, so early repayment reduces total interest by the days saved.

The method used significantly impacts savings. The Rule of 78 is less favorable to borrowers because it front-loads interest payments. For example, repaying a $100,000 loan at 5% annual interest over 30 years would save approximately $1,870 in interest after one year under simple interest but only $1,200 under the Rule of 78 (Federal Reserve data, 2021). A 2010 study by the Consumer Financial Protection Bureau (CFPB) found that loans using the Rule of 78 can result in up to 50% less savings compared to simple interest for early repayment. Lenders must disclose the method, but borrowers should verify terms to avoid unexpected costs. Prepaid interest clauses or penalties may further reduce savings. Thus, understanding the calculation method is critical for optimizing early repayment benefits.

The CFPB’s 2023 guidance emphasizes transparency, noting that 15% of U.S. installment loans still use the Rule of 78, despite its decline post-2010. Switching to simple interest would save an average of $2,300 annually for a typical mortgage borrower, according to Bankrate (2022). Proactive review of loan agreements and negotiation for favorable terms are essential to maximize savings.