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What is a precomputed auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make smarter financial decisions by providing you with interactive financial calculators and financial tools, publishing original and objective content. This allows you to conduct research and compare data for free and help you make informed financial decisions. 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 website are provided by companies that compensate us. This compensation can affect the way and when products are featured on the site, such as such things as the order in which they may appear in the listing categories and other categories, unless prohibited by law for our loans, mortgage,, and other products for home loans. But this compensation does not influence the content we publish or the reviews you read on this site. We do not include the universe of companies or financial offers that may be available to you.



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

Kellye Guinan is a freelance editor and writer with over five years of experience in personal finances. She's also a full-time worker at her local library in which she assists the community gain access to information on financial literacy, in addition to other subjects.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are committed to helping readers gain confidence to control their finances by providing concise, well-researched and well-studied content that breaks down complicated topics into manageable bites.









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Precomputed Interest is a rare method of calculating the the interest rate on an automobile loan which benefits the lender. Rather than spread the interest out over the course of the loan the interest is a front-loaded one, which means you pay more than you would at the beginning of the loan and less at the end. If you pay the minimum amount and do not make any distinctions between pre-calculated auto loans. You will get some money back if you repay your auto loan early, but it will be lower than a standard auto loan. The way a precomputed interest auto loan works "Precomputed" is the term used to describe how the lender determines the amount of interest you will pay over the loan duration. It then adds this amount to your principal amount and splits it into monthly payments as with traditional auto loans which use interest that is simple. The method used to calculate interest favors lenders when you pay early. They aren't as common as simple interest loans. It is more likely that you will get them from buy-here-pay-here dealers as well as other lenders who are working in conjunction with bad credit borrowers. Due to this, they tend to have higher interest rates. The rate you pay will be an interest rate and an annual percent rate which includes any additional fees. Precomputed interest in comparison to. simple interest While precomputed interest is a way to front load what you pay, split the interest paid evenly. Making over the amount of your monthly decreases the principal amount, which means you pay less interest in the following month. If you just make the minimum amount of payment it won't be a difference between these two ways to determine interest. But if you plan to pay off your auto loan quickly, simple interest loans are the better choice. This is the rule that applies to 78. Lenders aren't legally permitted to charge you interest which hasn't accrued. However, they may alter the method of dividing interest throughout the duration of a loan. This rule can alter the way you pay, but will not impact the total amount you pay. The is among the principal methods -- and is the basis for precomputed auto loans. Lenders add up all the months of the year, which is 78, and they then calculate interest using reverse-order. During a one-year loan it is possible to have to pay 12/78 percent of interest due in the initial month. The second month is 11/78, the third month is 10/78 and the cycle continues. This means that you'll have to pay more at the start of your loan. There is a chance to get a refund on interest when you repay your loan early, though you won't save as much as you could with a standard interest loan. Some states have banned rules like 78 -and it's unlawful for loans lasting at least 61 months. Be sure to check your state's laws to make sure your lender doesn't offer you the wrong loan. What is the method by which interest refunds are calculated for precomputed interest auto loans? They are calculated using subtracting interest you have been paying from interest remaining on the loan. However, since the interest is a frontloaded charge -which means you pay a higher amount at the beginning of the loan the loan is paid off. You will have less refunded the longer you have to pay off your loan. As an example, you'll pay about $4,800 in interest on an $30,000 loan with 60-month term of repayment with a 6 percent interest rate. If you repay your loan two years earlier it will be a two-year loan. The lender will add all three of the years -multiplying 78 times three to arrive at 234 then divide that number by 390, that's the principle of 78 spread across five years. The lender has made 60 percent of its interest at this moment. So you will receive the remainder of the 40 percent -- totaling $1,920. Benefits and drawbacks of precomputed rates of interest Precomputed rate of interest is only an advantage when you wish to pay off your loan early. In any other case, it will cost the same as a standard interest loan. Advantages: Since precomputed interest favors the lender, they are more likely to be granted to those who have less than perfect credit. If you aren't eligible for a basic interest auto loan, you may still be approved for precomputed interest loan. There is no difference in the amount of interest that you pay with the precomputed interest auto loan. If you adhere to the minimum payment schedule and you are able to calculate the interest, a precomputed loan is precisely identical to a regular interest loan.
Cons The major drawback with precomputed interest is early payments. It is more expensive to pay interest if you repay your loan in advance, which means less savings for being financially responsible. Since lenders are only able to apply the rule of 78 on loans that are sixty months and less, it is possible that you might have higher monthly payments. If you only qualify for a precomputed auto loan then your loan might be more costly between months.

What are the reasons you should stay clear of automated interest-based automobile loans In general straightforward interest rates are the better option for most borrowers. Even if you don't have plans to pay off your loan in the near future it is possible that your situation will change. If 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 savings if repay in a timely manner. It could be only a tiny difference, but it's still your money. The lower the amount you must pay your lender, the more favorable. The bottom line Precomputed auto loans are not a good idea, but they also are not the worst thing if you only plan to make minimum payments. However, you must find more lenders -- and, if you are lucky, a better deal.


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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 of experience in personal finance. She also works full-time as a librarian at the local library where she helps her community gain access to information on financial literacy, among other subjects.



Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are committed to helping readers feel confident to manage their finances by providing precise, well-researched and well-understood information that breaks down otherwise complicated topics into bite-sized pieces.






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