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3 minutes read. Published 17 October 2022
Authored 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 finances. She is also a full-time librarian at the local library which she assists her local community to get information on financial literacy, among other subjects.







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 take control of their finances by providing precise, well-studied 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 benefits the lender. Instead of spread the interest out over the life 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 towards the end. If you make minimum payments, there is no difference between the precomputed interest auto loans. You will get some money back if pay off your auto loan early, but it will be smaller than that of a regular auto loan. The way a precomputed interest auto loan operates "Precomputed" means that the lender calculates the amount you'll pay over the loan period. It then adds the rate of interest on top of the principle amount and divides it into monthly payments as with traditional auto loans which use interest that is simple. The way interest is calculated is advantageous to lenders if you are able to pay early. They're not as popular as traditional interest loans. They are more likely to get them from buy-here-pay-here dealers and other lenders that deal with bad credit borrowers. This is why they tend to have very high interest rates. You'll receive an interest rate and an annual percentage rate that includes any additional fees. Precomputed interest in comparison to. simple interest While precomputed interest front-loads what you pay you, it is possible to split the interest evenly. If you pay over the amount of your monthly payment cuts down on the principal, which in turn means you pay less interest in the following month. If you only make the minimum payment, there won't be a distinction between these two methods to determine interest. But if you plan to make an effort to repay your auto loan in a short time, then simple interest loans are the better choice. The rule of 78 Lenders are not legally allowed to charge you interest that hasn't been accrued. But they can change the method of dividing interest over the course of a loan. A rule called 78 can alter the way you pay, but do not affect the amount you pay. This is among the principal methods -- and is 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. During 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 so on. That means that you'll be paying more at the beginning of your loan. There is a chance to get a refund on interest when you take care to pay off your loan in advance, but you won't save as much as you would with a simple interest loan. Some states have banned the rule of 78 -- and it is nationally prohibited 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 an unconstitutional loan. What is the method by which interest refunds are calculated for precomputed auto loans? Refunds are calculated by subtracting the interest you've previously paid off from balance of interest on your loan. However, since the interest is frontloadedwhich means you pay a higher portion at the beginning of the loan -- you will receive less money back the longer you wait to repay your loan. As an example, you'll be paying around $4,800 in interest for 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 up 3 years of interestmultiplying 78 by 3 to come up with 234 then divide that number by 390, that's the principle of 78 divided over five years. The lender will have received 60 percent of the interest at this point. So you will receive an amount of refunding the remaining 40 percent -- totaling $1,920. Advantages and drawbacks of precomputed interests Precomputed interest is only an advantage if you want be able to repay your loan in advance. Otherwise, it will cost the same amount as a regular interest loan. Pros Because precomputed interest benefits 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 however, you could still be eligible for an interest-only precomputed loan. There's no difference in how much interest you pay on a precomputed interest auto loan. If you follow the minimum payment plan for precomputed interest, the 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 pay off your loan earlier and this means you will have lower savings and less responsible. Since lenders can only use the rule of 78 on loans with terms of 60 months or less, you could have higher monthly payments. If you are only eligible for a precomputed auto loan then your loan could be more expensive in the month.

Why you should avoid precomputed interest auto loans In general, straightforward interest rates are the better option for most borrowers. Even even if you're not planning to repay your loan early now the situation may alter. And if it does, an easy interest loan can mean you'll pay less overall. Since you pay higher interest when you first take out a precomputed auto loan, you'll miss the savings if you pay off your loan early. It may only be an insignificant difference, but it's your money. The less you have to pay your lender the less you pay, the more favorable. 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 possibly a better rate.


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Written by a Personal and Business finance contributor

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



Edited 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 to take control of their finances by providing concise, well-studied information that breaks down otherwise complicated subjects into digestible pieces.






Auto loans editor




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