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What is a precomputed auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators that provide objective and original content. We also allow you to conduct your own research and compare data for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this site are from companies that compensate us. This compensation may impact how and when products are featured on this site, including such things as the order in which they may be listed within the categories of listing in the event that they are not permitted by law. Our loans, mortgage, and other products for home loans. But this compensation does have no impact on the information we provide, or the reviews appear on this website. We do not cover the entire universe of businesses or financial offers that may be available to you.



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3 min read . Published on October 17, 2022.
Authored by Kellye Guinan. Written by personal and business finance contributor

Kellye Guinan is a freelance editor and writer with more than five years of experience in personal financial matters. She also works full-time as a worker at her local library where she helps her community access information about financial literacy, in addition to other topics.







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

Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers gain confidence to manage their finances through providing precise, well-studied information that breaks down otherwise complex subjects into bite-sized pieces.









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Precomputed Interest is a rare method of calculating the interest on an auto loan which benefits the lender. Instead of spread the interest out over the life of the loan the interest is front-loaded -- meaning you pay higher rate at the start of your loan and less towards the end. If you make minimum payments it is not a difference between pre-calculated interest auto loans. You will get some money back if you repay the auto loan in advance, but it will be lower than a standard interest auto loan. How a precomputed interest auto loan operates "Precomputed" means that the lender calculates the interest you will pay over the loan duration. It then adds the rate of interest on top of the principle amount and divides it into monthly payments like regular auto loans that use simple interest. The way interest is calculated benefits lenders if you repay early. They aren't as common as simple interest loans. It is more likely that you will find them offered by buy-here-pay-here dealers as well as other lenders who work in conjunction with bad credit borrowers. Because of this, they tend to have very high interest rates. The rate you pay will be an interest rate and an annual percent rate, which includes any additional charges. Precomputed interest vs. simple interest While precomputed interest is a way to front load what you pay you, it is possible to split the interest equally. Making over the amount of your monthly amount decreases the principal, which in turn results in a lower interest rate the next month. If you just make the minimum payment it won't be a difference between these two ways to determine interest. But if you plan to make an effort to repay your auto loan quickly, interest-only loans are the best choice. It is a rule of law that says 78. Lenders are not legally allowed to charge interest that hasn't accrued. However, they may alter the method of dividing interest across a loan. This rule can alter how you pay but not the total amount you pay. This is among the principal tactics -- and the foundation for precomputed interest auto loans. Loan lenders add up all months of the year, which is 78, and they then calculate interest using reverse-order. In the course of a one-year loan you'd pay 12/78 of the interest due in the initial month. The second month would be 11/78, the 3rd month is 10/78, and on and so forth. That means that you'll be paying more at the beginning of your loan. You can get a rebate on interest if you pay off your loan early, though you will not save as much as you would with an interest loan. Some states have banned using rules like 78 -and it's prohibited for loans that last at least 61 months. Examine the laws of your state to ensure that your lender doesn't offer you an unconstitutional loan. What is the method by which interest refunds are calculated for precomputed auto loans? The refunds can be calculated as a result of subtracting the interest you have already paid from the balance of interest on the loan. Because the interest is a frontloaded charge -- you pay a greater portion at the beginning of the loan the loan is paid off. You will have less refunded the longer you have to complete the repayment of the loan. For instance, you'll be paying around $4,800 in interest for a $30,000 loan with a 60-month repayment term and a 6 percent interest rate. If you pay your loan two years early, the lender will add 3 years of interest- multiplying 78 by three to come up with 234 then divide that number by 390, which is the rule of 78 spread over five years. The lender will have received 60 percent of the interest at this point. So you will receive the remainder of the 40 percent -- totaling $1,920. Advantages and drawbacks of precomputed interest Precomputed interest is not a problem when you wish you to settle 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 and the lender, they are much more likely to get granted to those who have less than perfect credit. If you don't qualify for a standard interest auto loan but you might be eligible for precomputed interest loan. There's no distinction in the amount of interest you pay for an auto loan. If you stick to the minimum payment plan for precomputed interest, the loan is the same as a simple interest loan.
Cons The main drawback of precalculated interest is that it can lead to early payments. You'll pay more interest if you pay off your loan early that means less savings for being financially responsible. Since lenders can only use the 78 rule for loans that are sixty months and less, it is possible that you might be paying more monthly. If you only qualify for a precomputed-interest auto loan, your loan might be more costly in the month.

Why you should avoid automated interest-based auto loans In general straightforward interest rates are the best choice for nearly every borrower. Even if you don't have plans to pay back your loan in the near future it is possible that your situation will change. And if it does, an easy interest loan could mean that you pay lower overall. Since you pay higher interest in the beginning of an auto loan and you'll lose the savings if you repay early. It could be an insignificant variation, but it's your money. The less you need to pay your lender, the better. The bottom line is that precomputed auto loans are not a good idea however they are not a bad thing when you plan to pay minimum monthly payments. However, you must locate more lenders and possibly a better rate.


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Written by a Personal and Business finance contributor

Kellye Guinan is a freelance editor and writer with more than five years ' experience within personal finances. 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.



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

Rhys has been editing and writing for Bankrate from late 2021. They are passionate about helping readers gain the confidence to control their finances through providing concise, well-studied information that is broken down into complicated subjects into digestible pieces.






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