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What is a precomputed interest auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial decisions by offering interactive financial calculators and tools as well as publishing high-quality and impartial content, by enabling you to conduct your own research and compare data for free - so that you can make informed financial decisions. Bankrate has agreements with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The offers that appear on this site are from companies who pay us. This compensation can affect the way and when products are featured on this site, including for instance, the sequence in which they be listed within the categories of listing in the event that they are not permitted by law. Our loans, mortgage,, and other home loan products. But this compensation does affect the content we publish or the reviews that appear on this website. We do not cover the entire universe of businesses or financial deals that could be available to you.



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3 min read . Published October 17, 2022
Written 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 finances. She is also a full-time librarian at the local library which she assists her local community to gain access to information on financial literacy, among other topics.







The edit was done by 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 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 unique method of calculating the the interest rate on an automobile loan which benefits the lender. Rather than spread the interest out over the life of the loan it is front-loaded -- meaning you pay higher than you would at the beginning of the loan and less towards the end. If you pay the minimum amount, there is no difference between and precomputed auto loans. You will get some money back if you pay off the auto loan in advance however it's less than with a simple interest auto loan. How a precomputed interest auto loan functions "Precomputed" means that the lender calculates the amount you will pay over the loan duration. It then adds the interest to the principal, and divides it into monthly installments as with standard auto loans which use simple interest. The way interest is calculated favors lenders when you pay early. They're not as popular as traditional interest loans. It is more likely that you will find them offered by buy-here-pay-here dealers as well as other lenders who deal in conjunction with bad credit borrowers. This is why they typically have very high interest rates. You'll receive an interest rate and an annual percent rate which includes any additional fees. Precomputed interest is different from. simple interest While precomputed interest charges you upfront you, it is possible to split the interest equally. Making higher than your minimum reduces the principal amount, which means you pay less interest each month. If you make only the minimum payment then there will be no distinction between these two methods to determine interest. If you intend to pay off your auto loan quickly, simple interest loans are the best option. The rule of 78 Lenders are not legally allowed to charge interest that isn't earned. However, they may alter the way interest is divided over the course of the course of a loan. This rule changes how you but do not affect the total amount you have to pay. This is one of the main methods -- and is the foundation for precomputed interest auto loans. Lenders add up all the months in the year, which is 78, and then apply interest in reverse order. For a one-year loan, you would be paying 12/78 on the total interest due in the first month. The second month would be 11/78, the 3rd month is 10/78, and so on. This means you will pay more at the start of your loan. You can get a rebate on interest if you take care to pay off your loan in advance, but you will not save as much than you would with a simple interest loan. Some states have banned using this rule of 78in addition, it's illegal for loans lasting 61 months or longer. Examine the laws of your state to make sure your lender isn't providing you with 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 interest you have previously paid off from remaining interest on the loan. But because the interest is frontloaded -that is, you pay a larger part at the start of the loan and you'll be able to receive less in the time you take to repay the loan. For example, you will pay about $4,800 in interest for a $30,000 loan with a 60-month repayment term with a 6 percent interest rate. If you repay your loan two years in advance then the lender will add up the first three years -- multiplying 78 by three to get 234 -- then divide this number by 390 which is the rule of 78 divided over five years. The lender has received 60 percent of the interest at this point. This means you'll get a refund for the remaining 40 percent , totalling $1,920. Advantages and drawbacks of precomputed interests Precomputed interest is only a drawback in the event that you need to pay off your loan in advance. Otherwise, it will cost the same as a simple interest loan. Pros Because precomputed interest benefits the lender, they are more likely to be provided to borrowers with less-than-perfect credit. If you aren't eligible for a standard interest auto loan, you may still be able to get precomputed interest loan. There's no difference in the amount of interest that you pay on the precomputed interest auto loan. If you adhere to the minimum payment plan, a precomputed interest loan is exactly like a standard 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 early that means less savings for being financially responsible. Since lenders can only use the 78 rule for loans that have terms of 30 months or more, you might have higher monthly payments. If you're only qualified for a precomputed auto loan then your loan might be more costly between months.

What are the reasons you should stay clear of automated interest-based car loans In general straightforward interest rates are the better option for most borrowers. Even when you don't plan to pay back your loan in the near future, your situation could change. And if it does, a simple interest loan will mean you pay lower overall. Since you pay higher interest in the beginning of an auto loan you'll be missing out on savings if you pay off your loan early. This may be just an insignificant difference, but it's still your money. The lower the amount you must pay your lender and the lower your monthly payments, the better. The bottom line Precomputed auto loans are avoidable however they are not a bad thing for those who only intend to pay minimum monthly payments. However, you must locate more lenders and, if you are lucky, a better deal.


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Written by 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 finances. She's also a full-time employee at the library in her town where she helps her community access information about financial literacy, among other topics.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate from late 2021. They are passionate about helping readers feel confident to take control of their finances with precise, well-researched and well-understood information that breaks down otherwise complicated subjects into digestible pieces.






Auto loans editor




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