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3 min read . Published October 17, 2022
Writer: 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 finance. She's also a full-time librarian at the local library where she helps her community gain access to information on financial literacy, as well as other topics.







Editor: Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since late 2021. They are passionate about helping readers gain confidence to control their finances with precise, well-studied information that break down complex topics into manageable bites.









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Precomputed Interest is a rare way of calculating rates on an auto loan which benefits the lender. Instead of dispersing the interest equally over the course of the loan the interest is front-loaded -- meaning that you pay more in than you would at the beginning of the loan and less at the conclusion. If you pay the minimum amount, there is no difference between and precomputed auto loans. There is a chance to get some money back if pay off the auto loan early however, it's lower than a standard auto loan. What is a precomputed auto loan functions "Precomputed" means the lender calculates the interest that you'll be paying over the loan term. It then adds the rate of interest on top of the principle and divides it into monthly payments as with traditional auto loans which use simple interest. The method of calculating interest is advantageous to lenders if you are able to pay early. They aren't as common as regular interest loans. They are more likely to get them from buy-here-pay-here dealers as well as other lenders who work in conjunction with bad credit borrowers. This is why they typically have high interest rates. The rate you pay will be an interest rate and an annual percentage that also includes any additional fees. Precomputed interest in comparison to. simple interest. Precomputed interest front-loads what you pay, split the interest paid evenly. Paying higher than your minimum amount decreases the principal, which, in turn, will mean you pay less interest in the following month. If you only make the minimum amount it won't be a distinction between the two methods to calculate interest. If you intend to pay off your auto loan in a short time, then simple interest loans are the better choice. It is a rule of law that says 78. Lenders are not legally allowed to charge you interest which isn't earned. However, they are able to alter the way interest is divided over the course of the course of a loan. This rule alters how you but do not affect the amount you pay. This is one of the main strategies -- and also the foundation for precomputed interest auto loans. Loan lenders add up all 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 amount due in the initial month. The second month would be 11/78, the 3rd month is 10/78, and so on. This means that you'll have to have to pay more in the beginning of your loan. You can get a rebate on interest if you repay your loan in advance, but you won't save as much as you would with a simple interest loan. Some states have banned using the rule of 78in addition, it's prohibited for loans that last more than 61 months. Check your state's laws to ensure your lender isn't providing you with the wrong loan. What is the method by which interest refunds are calculated for precomputed interest auto loans? The refunds can be calculated as a result of subtracting the amount of interest you have previously paid off from remaining interest on the loan. But because the interest is a frontloaded charge -that is, you pay a larger portion at the beginning of the loan and you'll have less refunded the longer you wait to repay your loan. For example, you will be paying around $4,800 in interest on an $30,000 loan with 60-month term of repayment and a 6-percent interest rate. If you repay your loan two years early it will be a two-year loan. The lender will add up the first three years -- multiplying 78 by three to get 234 -- then divide that number by 390, which is the standard of 78 divided over five years. The lender will have received 60 percent of the interest by this point. This means you'll get a refund for the remaining 40 percent , totalling $1,920. Benefits and drawbacks of precomputed interest Precomputed interest is not a problem if you want be able to repay your loan early. Otherwise, it will cost you the same as a standard interest loan. Benefits Since precomputed interest is beneficial to the lender, they are more likely to be offered to those with less than perfect credit. If you aren't eligible for a simple interest auto loan however, you could still be able to get a precomputed interest loan. There's no difference in how much interest you pay on a precomputed interest auto loan. If you adhere to the minimum payment plan for precomputed interest, the loan is exactly identical to a regular interest loan.
Cons The major drawback with precalculated interest is that it can lead to early payments. You'll pay more interest if you repay your loan early and this means you will have less savings for being financially responsible. Because lenders are limited to using the 78 rule for loans with terms of sixty months and less, it is possible that you could have higher monthly payments. If you're only qualified for a precomputed interest auto loan then your loan may be more expensive between months.

What are the reasons you should stay clear of precomputed interest car loans In general straightforward interest rates are the best option for most borrowers. Even even if you're not planning to pay back your loan at a later date the situation may alter. If it does, an easy interest loan could mean that you pay less overall. Since you pay higher interest when you first take out an auto loan, you'll miss out on savings if you make a payment early. It may only be an insignificant difference, but it's still your money. The lower the amount you must pay your lender, the more favorable. The bottom line is that precomputed rates of auto loans can be avoided however they are not a bad thing for those who only intend to make minimum payments. But, it is important to locate 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 ' experience within personal finances. She also works full-time as a librarian at the local library where she helps her community get information about financial literacy, among other topics.



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 through providing concise, well-studied information that is broken down into complex topics into manageable bites.






Auto loans editor




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