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What is a precomputed interest auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial choices by providing you with interactive financial calculators and tools, publishing original and objective content. This allows you to conduct your own research and compare data for free and help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The deals that are advertised on this site come from companies that compensate us. This compensation could affect how and when products appear on this site, including such things as the order in which they may appear within the listing categories, except where prohibited by law for our loans, mortgage,, and other products for home loans. However, this compensation will have no impact on the content we publish or the reviews appear on this website. We do not cover the entire universe of businesses or financial offerings 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 ' experience within personal financial matters. She is also a full-time employee at the library in her town which she assists her local community to gain access to information on financial literacy, in addition to other subjects.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate from late 2021. They are dedicated to helping readers gain the confidence to control their finances by providing concise, well-researched and well-studied content that breaks down complicated subjects into bite-sized pieces.
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Precomputed interest is a unique method of calculating the the interest rate on an automobile loan that benefits the lender. Rather than spreading the interest evenly out over the course of the loan, the interest is front loaded, meaning that you pay more in interest at the beginning of the loan and less at the conclusion. If you make minimum payments it is not a difference between pre-calculated interest auto loans. There is a chance to get some money back if you pay off your auto loan early however it's less than with a simple interest auto loan. What is a precomputed auto loan operates "Precomputed" means the lender calculates the amount you will pay over the loan duration. It then adds the rate of interest on top of the principle, and divides it into monthly payments like traditional auto loans that use simple interest. The method used to calculate interest benefits lenders if you repay early. They're not as popular as traditional interest loans. You are more likely to get them from buy-here-pay-here dealers and other lenders that are working on behalf of bad credit borrowers. Due to this, they tend to have very high interest rates. The rate you pay will be the interest rate along with an annual percentage which includes any additional charges. Precomputed interest vs. simple interest. While precomputed interest front-loads what you pay you, it is possible to split the interest evenly. Paying more than the minimum payment cuts down on the principal amount, which in turn results in a lower interest rate the next month. If you make only the minimum amount it won't be a distinction between the two methods to determine interest. However, if you are planning to try to repay your auto loan quickly, simple interest loans are the best choice. It is a rule of law that says 78. Lenders aren't legally permitted to charge interest that hasn't accrued. However, they are able to alter how interest is distributed throughout the course of a loan. A rule called 78 alters how you pay but not the total amount you have to pay. This is among the most popular methods -- and is the basis for precomputed interest auto loans. The lenders add all the months of the year which total 78, and they then calculate interest using reverse-order. During a one-year loan it is possible to have to pay 12/78 percent of interest due in the initial month. The second month is 11/78, the third month is 10/78 and the cycle continues. This means that you'll have to have to pay more in the beginning of your loan. You may be eligible for a discount on interest when you pay off your loan in advance, but you will not save as much than you would with a simple interest loan. Certain states have prohibited this rule of 78 -and it's prohibited for loans lasting at least 61 months. Be sure to check your state's laws to ensure your lender isn't providing you with the wrong loan. How is an interest refund calculated for precomputed auto loans? The refunds can be calculated as a result of subtracting the amount of interest you have been paying from remaining interest on the loan. Because the interest is a frontloaded charge -that is, you pay a larger part at the start of the loan -- you will have less refunded the longer you take to complete the repayment of the loan. For instance, you'll be paying around $4,800 in interest for the $30,000 loan with a 60-month repayment term and a 6 percent interest rate. If you pay your loan two years early, the lender will add up all three of the years -multiplying 78 times three to come up with 234 then divide this number by 390 which is the rule of 78 divided over five years. The lender has made 60 percent of its interest by this moment. So you will receive an amount of refunding the remaining 40%, which is $1,920. Benefits and drawbacks of precomputed interests Precomputed interest is only a drawback in the event that you need you to settle your loan in advance. In other cases, it'll cost you the same as a standard interest loan. Advantages: Since precomputed interest favors the lender it is most likely to be offered to those with less than perfect credit. If you're not eligible for a simple interest auto loan however, you could still be approved for a precomputed interest loan. There's no distinction in how much interest you pay with an auto loan. If you follow the minimum repayment schedule for precomputed interest, the loan is the same as a simple interest loan.
Cons The main drawback of precomputed interest is early payments. You'll pay more interest if you repay your loan earlier and this means you will have less savings for being financially responsible. Since lenders can only use the rule of 78 on loans that have terms of sixty months and less, it is possible that you may pay more in monthly installments. If you're only qualified for a precomputed-interest auto loan then your loan might be more costly between months.
The reasons to avoid automated interest-based automobile loans In general simple interest is the best option for most borrowers. Even if you don't have plans to pay back your loan early now it is possible that your situation will alter. In the event that it does, an easy interest loan will mean you pay less in total. Because you pay more interest at the start of a precomputed auto loan you'll be missing savings if repay in a timely manner. This may be just a small variation, but it's your money. The less you need to pay your lender, the more favorable. The bottom line is that precomputed rates of auto loans can be avoided however they are not the most ideal option for those who only intend to make minimum payments. But, it is important to find more lenders -- and, if you are lucky, a better deal.
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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 of experience in personal finance. She's also a full-time employee at the library in her town in which she assists the community access information about 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 from late 2021. They are committed to helping readers to control their finances with clear, well-researched information that breaks down complicated topics into bite-sized pieces.
Auto loans editor
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