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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 ' experience within personal finance. She's also a full-time librarian at the local library in which she assists the community gain access to information on 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 since 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 digestible chunks.









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Precomputed interest is an uncommon way of calculating interest on an auto loan that is beneficial to the lender. Rather than spread the interest out over the life of the loan it is front loaded, meaning you pay more rate at the start of your loan and less at the end. If you only make the minimum payments it is not a difference between the precomputed interest auto loans. You will get some money back if you pay off the auto loan early, but it will be lower than a standard auto loan. How a precomputed interest auto loan works "Precomputed" means the lender calculates the interest that you'll be paying over the loan duration. It then adds this amount to your principal and splits it into monthly payments as with traditional auto loans which use interest that is simple. The method used to calculate interest is advantageous to lenders if you are able to 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 and other lenders that deal on behalf of bad credit borrowers. Due to this, they tend to have higher interest rates. You'll receive an interest rate and an annual percent rate which also includes any additional fees. Precomputed interest in comparison to. simple interest. While precomputed interest front-loads what you pay, split the interest paid evenly. Making more than the minimum payment reduces the principal amount, which results in a lower interest rate in the following month. If you only make the minimum payment it won't be a distinction between these two methods to calculate interest. But if you plan to try to repay your auto loan quickly, simple interest loans are the best choice. It is a rule of law that says 78. Lenders are not legally allowed to charge interest that isn't earned. But they can change the method of dividing interest across a loan. A rule called 78 alters how you pay but do not affect the total amount you have to pay. It is among the principal methods -- and is the basis for precomputed interest auto loans. The lenders add all the months of the year, which total 78, and then apply interest in reverse order. In a one-year loan, you would be paying 12/78 on the total interest due in the first month. The second month is 11/78, and the third month is 10/78, and so on. That means that you'll be paying more at the beginning the term of your loan. You can get a rebate on interest if you repay your loan earlier, however you won't save as much as you would with a simple interest loan. Some states have banned using the rule of 78 -and it's unlawful for loans that last 61 months or longer. Be sure to check your state's laws to ensure that your lender isn't offering you the wrong loan. How is an interest refund calculated for precomputed interest auto loans? The refunds can be calculated as a result of subtracting the interest you have already paid from the remaining interest on the loan. Because the interest is frontloaded -which means you pay a higher portion at the beginning of the loan -- you will have less refunded the longer you wait to pay off your loan. For example, you will pay around $4,800 of interest on the $30,000 loan with 60-month term of repayment and a 6-percent interest rate. If you pay your loan two years earlier, the lender will add the first three years -- multiplying 78 by three to arrive at 234 then divide that number by 390, which is the standard of 78 spread across five years. The lender will have made 60 percent of its interest at this point. Therefore, you'll receive an amount of refunding the remaining 40%, which is $1,920. Benefits and drawbacks of precomputed interests Precomputed interest is only an advantage if you want to pay off your loan early. In any other case, it will cost you exactly the same as a standard interest loan. Advantages: Since precomputed interest favors the lender it is more likely to be granted to those who have less than perfect credit. If you don't qualify for a basic interest auto loan, you may still be eligible for a precomputed interest loan. There is no difference in the amount of interest you pay on an auto loan. If you follow the minimum payment schedule, a precomputed interest loan is identical to a regular interest loan.
Cons The biggest drawback to precalculated interest is the possibility of early repayments. It is more expensive to pay interest if you pay off your loan early that means lower savings and less responsible. Since lenders are only able to apply the rule of 78 on loans that have terms of sixty months and less, it is possible that you could be paying more monthly. If you are only eligible for a precomputed interest auto loan and you are not eligible for precomputed interest auto loans, your loan could be more expensive from month to month.

The reasons to avoid precomputed interest auto loans In general basic interest will be the better choice for nearly every borrower. Even if you don't have plans to repay your loan early now, your situation could change. If it does, a simple interest loan could mean that you pay less in total. Because you pay more in interest at the start of a precomputed auto loan, you'll miss the savings if you pay off your loan in a timely manner. This may be just a small variation, but it's your money. The lower the amount you must pay your lender and the lower your monthly payments, the better. The bottom line Precomputed interest auto loans are not a good idea however they are not the most ideal option for those who only intend to pay minimum monthly payments. Still, you should to locate more lenders and, if you are lucky, a better deal.


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Written by Business and personal finance Contributor

Kellye Guinan is a freelance editor and writer who has more than 5 years experience working in the field of personal finances. She is also a full-time worker at her local library where she helps her community gain access to information on financial literacy, as well as other subjects.



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

Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping their readers gain the confidence to manage their finances with precise, well-researched and well-understood information that is broken down into complex topics into manageable bites.






Auto loans editor




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