Sum-of-Digits Loan Settlement

Estimated reading time: 1 minute

This hypothetical assumes a valid, applicable sum-of-digits rebate provision, full payoff immediately after six on-time monthly installments, and no fees or other adjustments. It establishes no state-law entitlement.

Amount financed: $1,200. Precomputed interest: $156. Twelve equal payments total $1,356, or $113 monthly.

Wisconsin regulator’s explanation weights earlier months more heavily. For twelve installments, the weights total 78. After six, the remaining weights total 21: 6+5+4+3+2+1.

Modeled rebate: $156×21÷78=$42. Six unpaid installments total $678. Subtracting the rebate leaves $636 to settle this fictional schedule.

Half the term remaining does not mean half the interest is refundable. Using $78 instead would suggest $600, understating this modeled settlement by $36. Nor is $42 a second refund to subtract after paying $636.

Federal law requires a refund method at least as favorable as actuarial treatment for covered precomputed transactions exceeding 61 months, consummated after September 30, 1993. A shorter term does not establish permission under state law. Request the creditor’s written payoff statement and applicable rebate calculation before acting.