Residual Value
A lump sum owed to the financier at the end of a loan’s term, expressed either as a dollar value or a percentage of the amount borrowed.
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Retained Interest
Unpaid future interest included in an early payout figure. Also known as a Payout Penalty.
Rule of 78
A method of amortising interest across the payments made over the life of a loan, used by almost all Australia vehicle financiers for commercial car finance facilities.
Under the Rule of 78, the interest component of payment n is equal to the number of remaining payments (including payment n) divided by the sum of the sequence of terms between 0 and the total number of payments, multiplied by the total interest for the loan.
For example, with a 3 year loan paid monthly, there are 36 monthly payments. Therefore, the amount of interest applied in month 7 is equal to 30 (remaining months including current) divided by 666 (sum of the sequence of terms between 0 and 36), multiplied by the total interest to be paid over the term of the loan.
The “78” in Rule of 78 comes from applying the above formula to a 1 year loan paid monthly, where the sum of the sequence of terms between 0 and 12 equals 78.