Interest is calculated according to the Rule of 78. This method breaks down the principal and interest in each monthly repayment of the 100% Personal Loan Guarantee Scheme.
Rule of 78
This method puts a decreasing weight on interest and an increasing weight on principal across the repayment periods. The number 78 comes from adding up the number of months of a 12-month-loan:
1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 = 78
The interest is allocated to the repayment period in a reverse portion, such that 12/78 (first interest portion) of the total interest will be applied to the first month, 11/78 (second interest portion) of the total interest will be applied to the second month, etc.
Illustration of showing the proportion of interest and principal in each monthly repayment using rule of 78:
A customer borrows HKD100,000 for 120 months without 18-month principal repayment holiday, at a monthly flat rate of 0.043% and handling fee is waived. As such, the total loan principal is HKD100,000
Monthly interest = HKD100,000 x 0.043% = HKD43.00
Total interest for the full term = HKD43.00 x 120 months = HKD5,160.00
Monthly repayment = HKD(100,000 + 5,160.00) ÷ 120 = HKD876.33 rounded up to HKD876.40