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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 tools and financial calculators, publishing original and objective content. This allows you to conduct your own research and compare information at no cost to help you make financial decisions with confidence. Bankrate has agreements with issuers including, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The products that are featured on this website are provided by companies that compensate us. This compensation may impact how and when products are featured on the site, such as for instance, the sequence in which they be listed within the categories of listing and other categories, unless prohibited by law for our loans, mortgage, and other home lending products. But this compensation does have no impact on the information we provide, or the reviews that you see on this site. We do not cover the entire universe of businesses or financial deals that could be open to you.



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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 financial matters. 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 topics.







Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since late 2021. They are dedicated to helping readers gain the confidence to take control of their finances with precise, well-studied information that breaks down complicated subjects into bite-sized pieces.









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Precomputed interest is a unique way of calculating interest on an auto loan which benefits the lender. Instead of dispersing the interest equally throughout the duration 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 auto loans. You can get some cash back if you repay your auto loan early however, it's smaller than that of a regular interest auto loan. How a precomputed interest auto loan operates "Precomputed" means that the lender calculates the amount you will pay over the loan term. It then adds the interest to the principal, and divides it into monthly installments like regular auto loans that use simple interest. The method used to calculate interest benefits lenders if you repay early. They aren't as common as traditional interest loans. It is more likely that you will see them offered by buy-here, pay-here dealers as well as other lenders who deal on behalf of bad credit borrowers. Due to this, they are more likely to charge very high interest rates. You'll receive an interest rate as well as an annual percent rate which includes any additional charges. Precomputed interest in comparison to. simple interest. While precomputed interest is a way to front load what you pay divide the interest equally. Paying over the amount of your monthly payment cuts down on the principal, which results in a lower interest rate each month. If you only make the minimum payment then there will be no distinction between these two methods to determine interest. However, if you are planning to make an effort to repay your auto loan quickly, interest-only loans are the best choice. This is the rule that applies to 78. Lenders are not legally allowed to charge you interest which hasn't been accrued. However, they are able to alter how interest is distributed throughout the course of a loan. This rule alters how you pay but not the amount you pay. This is one of the main methods -- and is the foundation for precomputed interest auto loans. Lenders add up all the months of the year which add up to 78, the interest is then applied in reverse. In an one-year loan it is possible to be paying 12/78 on the total interest due in the first month. The second month will be 11/78, and the third month is 10/78 and on and so forth. This means that you'll have to be paying more at the beginning the term of your loan. You can get a rebate on interest when you pay off your loan earlier, however you will not save as much as you would with a simple interest loan. Some states have banned the rule of 78- and it is nationally illegal for loans that last more than 61 months. Examine the laws of your state to ensure that your lender isn't offering you the wrong 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 amount of interest you have previously paid off from balance of interest on your loan. But because the interest is frontloadedwhich means you pay a higher amount at the beginning of the loan -- you will have less refunded the longer you have to complete the repayment of the loan. For example, you will be paying around $4,800 in interest on an $30,000 loan with 60-month repayment terms and a 6 percent interest rate. If you pay your loan two years earlier it will be a two-year loan. The lender will add up the first three yearsmultiplying 78 times three to arrive at 234 then divide this number by 390 which is the rule of 78 divided over five years. The lender will have received 60 percent of the interest by this date. So you will receive a refund for the remaining 40%, which is $1,920. Benefits and drawbacks of precomputed rates of interest Precomputed rate of interest is only a drawback in the event that you need you to settle your loan early. In any other case, it will cost you the same as a standard interest loan. Benefits Since precomputed interest is beneficial to the lender it is much more likely to get provided to those with less than perfect credit. If you don't qualify for a simple interest auto loan however, you could still be approved for a precomputed interest loan. There's no distinction in the amount of interest you pay on a precomputed interest auto loan. If you adhere to the minimum repayment schedule for precomputed interest, the loan is precisely like a standard interest loan.
Cons The biggest drawback to precomputed interest is early payments. You will pay more in interest if you pay off your loan earlier and this means you will have less savings for being financially responsible. Since lenders can only use the 78 rule for loans with terms of 60 months or less, you may be paying more monthly. If you only qualify for a precomputed-interest auto loan and you are not eligible for precomputed interest auto loans, your loan may be more expensive between months.

The reasons to avoid automated interest-based car loans In general, straightforward interest rates are the best choice for nearly every borrower. Even if you don't have plans to pay off your loan at a later date, your situation could change. And if it does, a simple interest loan will mean you pay less overall. Because you pay more interest in the beginning of a precomputed auto loan and you'll lose out on savings if you pay off your loan in a timely manner. This may be just a small difference, but it's still your money. The lower the amount you must pay your lender the less you pay, the better. The bottom line is that precomputed auto loans are not a good idea, but they also are not the most ideal option if you only plan to pay minimum monthly payments. However, you must look for 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 finance. She also works full-time as a worker at her local library in which she assists the community gain access to information on financial literacy, among other subjects.



The edit was done by 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 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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