[Judge Roy Bean]

Originally Posted by BassBoy

IMHO, I think this is a great question and I would just love to know where this (garbage) is written…………Rule of 78?

Let’s set aside for the moment our claims of how money is created. My opinions here are what to do about the interest to principle ratio in the loan payments. Let’s say, I take a $120K loan to buy a home and I am to pay 6% interest and make 360 monthly payments. My principle and interest payment is $719.46/month. However, looking at how the Rule of 78 amortizes it, I would pay $7159.61 in interest and $1473.61 for the first year of the loan. Year 2 would be $7069.02 in interest and $1564.50 in principle, and so on and so forth. Well, I’m barely paying down the principle balance in the early years of the loan. This doesn’t make any sense, nor is it fair.

Nobody really said it needed to be "fair" when it comes to taking advantage of people. You've obviously done some calculations that many people are simply not willing to delve into.

Originally Posted by BassBoy

Allow me to explain……….

A $120K loan would end up costing me a total of $259,005.60 after 360 payments; so, my interest paid is $135,005.60. Well, it seems logical that the interest would be divided by 360 (months) and so would the principle. This is basic, elementary math people. So, the way I see it is this……..

You're applying a linear logic. Ammortization of loans is based on a monthly calculation as if the loan were "new" every month.

Originally Posted by BassBoy

Total interest of $135,005.60 divided by 360 = $386.13 ($4633.56 each year and never changes).
-And-
Total principle of $120,000.00 divided by 360 = $334.34 ($4333.32 each year and never changes).

My monthly payment is still the same, but the interest and principle have been equally divided over 360 payments. Makes sense, right? So why is it that in those early years of the loan, each montly payment is barely 1.2% of the principle balance being paid and 6% of the interest being paid? Again, the payment is still the same, but the interest and principle have been made equal each month and each year. This is simple math.

Again, not so simple - it is constituted as if a new loan were being calculated every month.

Originally Posted by BassBoy

So, my question is, how do you beat this rip-off?!?!?!?! Where is it written that the lenders MUST charge more interest early on and squat is being applied towards the principle? This makes absolutely no sense and is incomprehensible and I would like to know how to beat this wierd formula called Rule of 78.

You can't beat it unless you turn the entire economic system for investors in lending upside down. The investors who fund (i.e., buy debt instruments like bonds) are the ones who make lending possible. They have an anticipated return on their investment based on the loan terms. Without the almost rock-solid guarantees, they aren't going to put up their money and buy the bonds.

Originally Posted by BassBoy

Another rip-off that really pisses me off is these Home Depot store card, Lowe’s store card, Sears and whoever else that offer 12 months Same-As-Cash. I recently got one of these and bought some things with their great offer. Well, when I received my first bill, the minimum payment due, times 12 months, was not enough to pay off the balance in 12 months, thus, having a remaining balance after the 12 months and then getting slammed with the incurred interest charges. It’s bull@#*! I tell ya.

I can only say "caveat emptor."

But a very key point - very few, if any, secured loans (like mortgages) ever go to full term. Thus, the lending system has been geared to getting most of the investment back early on - hence the "standard" ammortization you're complaining about. The industry is tuned to recognize early payoffs; it's called "runoff" in the servicing biz. Obviously, a loan that's paid off early doesn't pay as much in interest as the bond buyer might have expected, hence the "rule of 78's" formula that is sometimes used to make sure there is at least some predictable base return on the investment.

When it comes to lending, you have to take the position of the guy who shows up at the state fair and is walking down the midway. Those other guys barking at you to play their game are making their living off of gettting you to throw that off-balance ball at the hoop that is way off dimension. Every once in a while some rube will walk off with the big stuffed animal, but that's only to keep more rubes coming by to take the chance.