Which method is used to allocate the finance charge before the final installment due date?

The method used to allocate the finance charge before the final installment due date is the sum of the balances method. This approach calculates the finance charge based on the outstanding balance of the loan at various points in time, allowing for a more precise allocation of interest based on the actual amount of debt still owed.

In practical application, as payments are made and the principal balance is reduced, the interest charged adjusts according to the remaining balance. This method is particularly beneficial for loans where the balance decreases over time, as it reflects how much interest is being paid on the actual outstanding amount, rather than assuming a static balance.

While other methods, such as amortization schedules, provide a structured repayment plan detailing each installment's principal and interest portions, they do not specifically allocate finance charges based on the remaining balance before the final due date. Similarly, the pro-rata method divides fees or charges proportionately across multiple outstanding amounts but does not focus on remaining balances in the same way. Simple interest calculation provides a straightforward approach to calculating interest, but it also does not adapt to the changing balance like the sum of the balances method does.