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3 min read . Published October 17, 2022
Written by Kellye Guinan Written by Personal and Business Finance contributor

Kellye Guinan is a freelance editor and writer with more than 5 years experience working in the field of personal finances. She also works full-time as a worker at her local library which she assists her local community to get information on financial literacy, as well as other subjects.







The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances through providing clear, well-researched information that breaks down otherwise complex topics into digestible chunks.









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Precomputed interest is a unique method of calculating the rates on an auto loan which benefits the lender. Instead of spreading the interest evenly out over the life of the loan it is front loaded, meaning that you pay more in interest at the beginning of the loan and less at the conclusion. If you only make the minimum payments and do not make any distinctions between pre-calculated auto loans. There is a chance to get some money back if pay off your auto loan in advance however, it's lower than a standard auto loan. How a precomputed interest auto loan operates "Precomputed" is the term used to describe how the lender calculates the interest you'll pay over the loan period. It then adds this rate of interest on top of the principle and divides it into monthly installments like traditional auto loans which use interest that is simple. The method used to calculate interest favors lenders when you pay early. They're not as popular as simple interest loans. They are more likely to see them offered by buy-here, pay-here dealers as well as other lenders who are working on behalf of bad credit borrowers. This is why they tend to have very high interest rates. The rate you pay will be the interest rate along with an annual percentage, which includes any additional charges. Precomputed interest is different from. simple interest. While precomputed interest is a way to front load what you pay, split the interest paid evenly. If you pay over the amount of your monthly payment decreases the principal amount, which results in a lower interest rate each month. If you just make the minimum payment then there will be no difference between these two ways to determine interest. If you intend to pay off your auto loan in a short time, then simple interest loans are the best choice. The rule of 78 Lenders aren't legally permitted to charge you interest which hasn't accrued. However, they are able to alter the method of dividing interest throughout a loan. The rule of 78 alters how you but not the total amount you have to pay. It is among the principal strategies -- and also the basis for precomputed interest auto loans. Loan lenders add up all months of the year, which total 78, and the interest is then applied in reverse. During an one-year loan it is possible to be paying 12/78 on the interest due in the initial month. The second month will be 11/78, and the third month is 10/78, and on and so forth. This means that you'll have to have to pay more in the beginning the term of your loan. You may be eligible for a discount on interest if you repay your loan in advance, but you won't save as much as you could with a standard interest loan. Some states have banned using rules like 78 -in addition, it's prohibited for loans lasting at least 61 months. Check your state's laws to make sure your lender doesn't offer you an illegal loan. How is an interest refund calculated for precomputed interest auto loans? The refunds can be calculated as a result of subtracting the amount of interest you have already paid from the remaining interest on the loan. Because the interest is frontloaded -- you pay a greater portion at the beginning of the loan and you'll have less refunded the longer you have to repay your loan. As an example, you'll pay around $4,800 of interest for an $30,000 loan with 60-month term of repayment and a 6-percent interest rate. If you pay off your loan two years in advance, the lender will add all three of the years- multiplying 78 by three to come up with 234 then divide that number by 390, that's the principle of 78 divided over five years. The lender has made 60 percent of its interest at this point. Therefore, you'll receive the remainder of the 40%, which is $1,920. Benefits and drawbacks of precomputed interests Precomputed interest is not a problem if you want to pay off your loan in advance. In any other case, it will cost the same amount as a regular interest loan. Benefits Since precomputed interest is beneficial to the lender, they are more likely to be provided to borrowers with less-than-perfect credit. If you're not eligible for a standard interest auto loan but you might be able to get an interest-only precomputed loan. There's no distinction in how much interest you pay with an auto loan. If you follow the minimum payment plan, a precomputed interest loan is precisely identical to a regular interest loan.
Cons The main drawback of precalculated interest is that it can lead to early payments. You will pay more in interest if you have to pay back your loan early that means less savings for being financially responsible. Because lenders are limited to using the 78-day rule on loans with terms of 30 months or more, you could pay more in monthly installments. If you only qualify for a precomputed auto loan, your loan could be more expensive from month to month.

What are the reasons you should stay clear of precomputed interest auto loans In general, simple interest is the better option for almost every borrower. Even when you don't plan to pay back your loan at a later date it is possible that your situation will change. In the event that it does, a simple interest loan could mean that you pay less in total. Because you pay more in interest in the beginning of an auto loan you'll be missing the savings if you make a payment early. It may only be only a tiny variation, but it's your money. The less you need to pay your lender and the lower your monthly payments, the more favorable. The bottom line is that precomputed auto loans are not a good idea however, they're not the worst thing if you only plan to pay minimum monthly payments. However, you must look for more lenders and, if you are lucky, a better deal.


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Written by Personal and business finance Contributor

Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal finance. She is also a full-time worker at her local library which she assists her local community to get information about financial literacy, in addition to other subjects.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers feel confident to manage their finances through providing concise, well-studied information that breaks down otherwise complicated subjects into digestible pieces.






Auto loans editor




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