How to Calculate a U.S. Rule Loan

An Explanation of Negative Amortization

A Step-by-Step Tutorial
Tutorial 16

The U.S. Rule is defined in the United States Consumer Financial Protection Bureau's (formerly the Fed's) Regulation Z, also known as the Truth in Lending Act:

3. U.S. Rule. The U.S. Rule produces no compounding of interest in that any unpaid accrued interest is accumulated separately and is not added to principal. In addition, under the U.S. Rule, no interest calculation is made until a payment is received.

Thus, under the U.S. Rule, only the unpaid principal balance (excluding unpaid interest) is used as the basis for interest due calculations. Further, if there are never periods of negative amortization, then there is no difference between normal amortization and amortization adhering to the U.S. Rule. (Negative amortization occurs when the loan balance is growing though payments are being made. That is, the payments are less than the interest due.) The Ultimate Financial Calculator supports all these concepts.

All users should work through the more detailed first tutorial to understand the Ultimate Financial Calculator's (UFC) basic concepts and settings.

To create an amortization schedule that adheres to the U S Rule and shows a separate interest balance, follow these steps:

  1. Set "Schedule Type" to "Loan"
    • Or click the [New] button to clear any previous entries.
  2. Set "Rounding" to "Adjust last amount to reach "0" balance" by clicking on the {Settings} {Rounding Options}
  3. In the header section, make the following settings:
    1. For "Calculate Method" select "U.S. Rule".
    2. Set "Initial Compounding" to "Monthly".
    3. Enter 6.0 for the "Initial Interest Rate".
  1. In row one of the cash flow input area, create a "Loan" series
    1. Set the "Date" to July 1, 2024
    2. Set the "Amount" to 35,000.00
    3. Set the "# Periods" to 1
      • Note: Since the number of periods is 1, you will not be able to set a frequency. If a frequency is set, it will be cleared when you leave the row
  1. Move to the second row of the cash flow input area.
    1. Select "Payment" for the "Series".
      • For this example, we will assume we want to create a schedule for a 5-year loan (60 monthly payments).
      • It has been agreed that the first six payments will be $150, which is less than the interest due
    2. Set the "Date" to August 1, 2024
    3. Set the "Amount" to $150.00
    4. Set the "# Periods" to 6
  1. Move to the third row of the cash flow input area
    1. Select "Payment" for the "Series"
    2. Set the "Date" to February 1, 2025
    3. Set the "Amount" to "Unknown" by typing "U"
    4. Set the "# Periods" to 54
  • Your calculator will now look like this (Fig. 1):
U.S. Rule initial setup
Fig. 1 - U.S. Rule initial setup
  1. Calculate the unknown. The result is $744.35. (Fig. 2)
U.S. Rule periodic payment
Fig. 2 - U.S. Rule calculated periodic payment
  1. To see the impact of the "U.S. Rule", you'll need to view the amortization schedule
    1. Click on the [Schedule] button. (Fig. 3)
U.S. Rule amortization table
Fig. 3 - U.S. Rule amortization schedule showing the unpaid interest balance.
(It is called negative amortization when the loan balance is increasing even when the loan is being paid.)
    • Points to note about the schedule:
    • Notice the negative amortization - the loan balance is increasing since the first six payments are less than the interest due
    • The unpaid interest is tracked as a separate balance as required by the U.S. Rule
    • Though the loan balance is increasing the amount of interest calculated for each period remains a constant $175.00
    • You may want to compare this schedule to one created with same inputs and the "Calculate Method" set to "Normal"

The U.S. Rule is a consumer friendly feature as it reduces the interest which would normally be paid otherwise. However, it only impacts interest calculations if negative amortization occurs and the difference will likely be minimal. You can use the Ultimate Financial Calculator to compare and find out.