Most installment loan contracts that use the add-on method include a prepayment penalty. A prepayment penalty is a special charge assessed to the borrower for paying off a loan early The rule of 78s method (also called the sum of the digits method is the most widely used method for calculating a prepayment penalty. Its name derives from the fact that for a one-year loan, the numbers between 1 and 12 representing each month add up to 78 (12 t 11 10 t 9 t 8 7+ 6 5 4 3 2 1 78) To illustrate the use of the rule of 78s method, consider the following example: Kim Cuttner from Cheyenne, Wyoming, has borrowed $4,500 for 12 months plus an additional finance charge of $720. She is scheduled to pay equal monthly installments of $435 ($5,220 12). Assume that Kim wants to pay off the loan after only 8 months. Step 1 Each month of Kim's loan is assigned a value (12 for the first month, 11 for the second month 10 for the third month, and so on Kim has the loan for the first 8 months. Adding up the values for each of the first 8 months gives you the following number: Step 2 According to the rule of 78s method, the lender assumes that a portion of the $720 add-on interest has already been paid. To determine how much interest that Kim has already paid, divide your answer from step 1 (the sum of the values for each month that Kim has the loan by 78. Then multiply this ratio by the total amount of add-on interest ($720). Perform this calculation and round your answer to the nearest penny Interest Paid 78) x $720