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3 min read Published on October 17, 2022.
Written by Kellye Guinan. 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 also works full-time as a worker at her local library which she assists her local community to access information about financial literacy, as well as other topics.







Edited by Rhys Subitch Edited by Auto loans editor

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









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Precomputed Interest is a rare method of calculating the interest rate on an automobile loan that is beneficial to the lender. Rather than dispersing the interest equally over the life of the loan, the interest is a front-loaded one, which means you pay higher than you would at the beginning of the loan and less at the conclusion. If you pay the minimum amount it is not a difference between and precomputed interest auto loans. There is a chance to get some money back if you pay off your auto loan in advance however it's lower than a standard auto loan. What is a precomputed auto loan operates "Precomputed" is the term used to describe how the lender calculates the interest you will pay over the loan term. It then adds this rate of interest on top of the principle amount and splits it into monthly payments like regular auto loans that use simple interest. The way interest is calculated is advantageous to lenders if you are able to pay early. They're not as widespread as regular interest loans. They are more likely to see them offered by buy-here, pay-here dealers and other lenders that are working on behalf of bad credit borrowers. Due to this, they tend to have high interest rates. You'll receive the interest rate along with an annual percent rate which also includes any additional fees. Precomputed interest in comparison to. simple interest While precomputed interest is a way to front load what you pay divide the interest equally. Paying over the amount of your monthly payment cuts down on the principal amount, which in turn will mean you pay less interest each month. If you only make the minimum amount of payment it won't be a distinction between these two methods to calculate interest. But if you plan to pay off your auto loan in a short time, then simple interest loans are the best option. It is a rule of law that says 78. Lenders aren't legally permitted to charge you interest which isn't earned. However, they may alter the method of dividing interest across the course of a loan. The rule of 78 can alter the way you pay, but do not affect the total amount you pay. It is among the most popular strategies -- and also the basis for precomputed auto loans. The lenders add all the months of the year which total 78, and they then calculate interest using reverse-order. In the course of a one-year loan you'd pay 12/78 of the total interest due in the initial month. The second month will be 11/78, the 3rd month is 10/78, and so on. This means that you'll have to be paying more at the beginning the term of your loan. You may be eligible for a discount on interest when you pay off your loan in advance, but you won't save as much than you would with a simple interest loan. Some states have banned using this rule of 78- and it is nationally prohibited for loans lasting 61 months or longer. Examine the laws of your state to make sure your lender isn't providing you with an unconstitutional loan. How is an interest refund calculated for precomputed auto loans? The refunds can be calculated as a result of subtracting the amount of interest you have been paying from balance of interest on the loan. However, since the interest is a frontloaded charge -which means you pay a higher part at the start of the loan the loan is paid off. You will be able to receive less in the time you take to complete the repayment of the loan. For example, you will be paying around $4,800 in interest for a $30,000 loan with a 60-month repayment term with a 6 percent interest rate. If you repay your loan two years in advance then the lender will add the first three years -- multiplying 78 by three to get 234 -- then divide that number by 390, which is the rule of 78 spread over five years. The lender has received 60 percent of the interest at this moment. So you will receive a refund for the remaining 40 percent , totalling $1,920. Benefits and disadvantages of precomputed interests Precomputed interest is only an advantage in the event that you need to pay off your loan early. In other cases, it'll cost the same amount as a regular interest loan. Pros Because precomputed interest benefits the lender, they are much more likely to get granted to those with less than perfect credit. If you're not eligible for a simple interest auto loan, you may still be eligible for precomputed interest loan. There's no difference in how much interest you pay on a precomputed interest auto loan. If you adhere to the minimum payment plan for precomputed interest, the loan is identical to a regular interest loan.
Cons The major drawback with precomputed interest is early payments. You'll pay more interest if you pay off your loan in advance that means less savings to be financially responsible. Since lenders are only able to apply the 78-day rule on loans that are sixty months and less, it is possible that you could have higher monthly payments. If you are only eligible for a precomputed-interest auto loan, your loan may be more expensive from month to month.

Why you should avoid automated interest-based auto loans In general, basic interest will be the better option for almost every borrower. Even when you don't plan to repay your loan in the near future it is possible that your situation will change. In the event that it does, a straightforward interest loan can mean you'll pay lower overall. Since you pay higher interest at the start of an auto loan you'll be missing savings if repay in a timely manner. It may only be only a tiny variation, but it's your money. The less you have to pay your lender and the lower your monthly payments, the more favorable. The bottom line is that precomputed auto loans can be avoided, but they also are not the most ideal option when you plan to make minimum payments. Still, you should to locate more lenders and potentially a better deal.


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Written by Business and personal finance contributor

Kellye Guinan is a freelance editor and writer with more than five years of experience in personal finance. She's also a full-time librarian at the local library where she helps her community gain access to information on financial literacy, as well as other subjects.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers to manage their finances through providing clear, well-researched information that is broken down into complicated subjects into digestible pieces.






Auto loans editor




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