Loan Information: What is the Rule of 72s?

The rule of 72 affects investment information more commonly than loan information. The rule of 72 is a way to easily calculate how long it will take an investment to double in value. With a simple calculator, pencil and paper you can quickly estimate the value. You only need to divide 72 by the investment rate in order to find out how quickly a value double.

In loan terms, the rule of 72 can be used to explain why a credit card balance never goes down. Try this scenario: You charge $300 to your credit card at a rate of 14%. Take 72/14, and you will learn that $300 will become $600 in just over 5 years. This realization helps people with very high balances understand the importance of paying down the balance on a credit line. 

A higher principal sum, such as $1,000, would become $2,000 if only interest rates are paid for 5 years. This is not taking into account the effect of compounding credit, which can actually add at least 2% in real charges over the course of one year as a general rule. In this example, $1,000 in compounding interest debt would become $2,000 in just four and a half years.