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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 who has more than five years of experience in personal finances. She also works full-time as a employee at the library in her town in which she assists the community gain access to information on financial literacy, among 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 passionate about helping readers gain confidence to control their finances through providing clear, well-researched information that breaks down complicated topics into digestible chunks.









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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 dispersing the interest equally over the life of the loan it is front-loaded -- meaning you pay higher rate at the start of your loan and less at the end. If you make minimum payments it is not a difference between pre-calculated auto loans. You can get some cash back if pay off your auto loan in advance, but it will be less than with a simple auto loan. What is a precomputed auto loan functions "Precomputed" is the term used to describe how the lender calculates the interest you'll pay over the loan term. It then adds this rate of interest on top of the principle amount and splits it into monthly payments as with traditional auto loans which use simple interest. The method of calculating interest favors lenders when you pay early. They aren't as common as traditional interest loans. They are more likely to find them offered by buy-here-pay-here dealers as well as other lenders who are working in conjunction with bad credit borrowers. Due to this, they are more likely to charge higher interest rates. You will receive an interest rate as well as an annual percentage that also includes any additional fees. Precomputed interest is different from. simple interest While precomputed interest front-loads what you pay, split the interest paid equally. If you pay more than the minimum cuts down on the principal amount, which means you pay less interest each month. If you only make the minimum amount of payment it won't be a difference between these two ways to determine interest. However, if you are planning 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 are not legally allowed to charge interest that hasn't accrued. However, they are able to alter the method of dividing interest across the duration of a loan. This rule can alter how you but will not impact the amount you pay. It is among the principal strategies -- and also the basis for precomputed interest auto loans. Loan lenders add up all months in the year, which add up to 78, then apply interest in reverse order. In an one-year loan it is possible to pay 12/78 of the interest due in the initial month. The second month would be 11/78, and the third month is 10/78, and the cycle continues. This means you will pay more at the start and end of the loan. You may be eligible for a discount on interest if you take care to pay off your loan early, though you will not save as much than you could with a standard interest loan. Some states have banned the rule of 78 -in addition, it's prohibited for loans that last more than 61 months. Check your state's laws to make sure your lender isn't offering you an unconstitutional loan. How is an interest refund calculated for precomputed interest auto loans? The refunds can be calculated as a result of subtracting interest you have already paid from the interest remaining on the loan. Because the interest is a frontloaded charge -that is, you pay a larger portion at the beginning of the loan -- you will receive less money back the longer you have to complete the repayment of your loan. As an example, you'll pay about $4,800 in interest for the $30,000 loan with a 60-month repayment term and a 6 percent interest rate. If you repay your loan two years earlier, the lender will add the first three yearsmultiplying 78 by 3 to come up with 234 then divide the result by 390, which is the rule of 78 divided over five years. The lender has received 60 percent of the interest by this date. This means you'll get the remainder of the 40%, which is $1,920. Benefits and disadvantages of precomputed rates of interest Precomputed rate of interest is only a drawback in the event that you need be able to repay your loan early. In other cases, it'll cost the same as a standard interest loan. Pros Because precomputed interest benefits the lender, they are more likely to be offered to those with less than perfect credit. If you don't qualify for a basic interest auto loan however, you could still be approved for an interest-only precomputed loan. There is no difference in the amount of interest you pay for an auto loan. If you adhere to the minimum repayment schedule for precomputed interest, the loan is precisely the same as a simple interest loan.
Cons The biggest drawback to precomputed interest is early payments. You'll pay more interest if you have to pay back your loan in advance and this means you will have less savings to be financially responsible. Since lenders are only able to apply the 78 rule for loans with terms of sixty months and less, it is possible that you may have higher monthly payments. If you're only qualified for a precomputed-interest auto loan, your loan might be more costly in the month.

Why you should avoid automated interest-based automobile loans In general straightforward interest rates are the better choice for nearly every borrower. Even even if you're not planning to repay your loan early now it is possible that your situation will alter. In the event that it does, a straightforward interest loan will mean you pay less in total. Because you pay more in interest at the start of an auto loan and you'll lose savings if repay early. This may be just an insignificant difference, but it's still your money. The lower the amount you must pay your lender, the better. The bottom line Precomputed interest auto loans are not a good idea however they are not the most ideal option if you only plan to make minimum payments. Still, you should to locate more lenders and possibly a better rate.


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Written by Business and personal finance contributor

Kellye Guinan is a freelance editor and writer who has more than five years ' experience within personal financial matters. She's also a full-time librarian at the 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 committed to helping readers gain the confidence to manage their finances with precise, well-researched and well-understood information that breaks down otherwise complicated topics into bite-sized pieces.






Auto loans editor




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