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What is a precomputed auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by offering interactive financial calculators and tools as well as publishing high-quality and impartial content. This allows you to conduct research and compare information for free to help you make financial decisions with confidence. Bankrate has partnerships with issuers, including but not limited 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 who pay us. This compensation may impact how and when products appear on the site, such as, for example, the order in which they appear within the listing categories in the event that they are not permitted by law. Our loan products, such as mortgages and home equity, and other home lending products. This compensation, however, does have no impact on the information we publish, or the reviews that appear on this website. We do not contain the entire universe of businesses or financial offers that may be accessible to you.
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3 min read Published 17 October 2022
Authored by Kellye Guinan. Written by Personal and Business Finance Contributor
Kellye Guinan is a freelance editor and writer with over five years of experience in personal financial matters. She’s 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, as well as other subjects.
The edit was done by Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since late 2021. They are committed to helping readers gain confidence to take control of their finances with clear, well-researched information that breaks down complicated topics into digestible chunks.
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Precomputed Interest is a rare method of calculating interest on an auto 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 at the conclusion. If you only make the minimum payments, there is no difference between and precomputed auto loans. There is a chance to get some money back if you pay off the auto loan in advance however, it’s less than with a simple auto loan. What is a precomputed auto loan operates «Precomputed» means the lender calculates the amount that you’ll be paying over the loan term. Then, it adds that amount to your principal and divides it into monthly payments as with regular auto loans that use simple interest. The method used to calculate interest is advantageous to lenders if you are able to pay early. They’re not as popular as simple interest loans. It is more likely that you will see them offered by buy-here, pay-here dealers and other lenders that deal on behalf of bad credit borrowers. Because of this, they tend to have higher interest rates. You will receive an interest rate and an annual percentage which also includes any additional fees. Precomputed interest vs. simple interest While precomputed interest front-loads what you pay you, it is possible to split the interest evenly. If you pay more than the minimum amount decreases the principal, which, in turn, means you pay less interest the next month. If you just make the minimum payment it won’t be a distinction between these two methods to calculate interest. However, if you are planning to try to repay your auto loan in a short time, then simple interest loans are the best choice. It is a rule of law that says 78. Lenders aren’t legally permitted to charge you interest which hasn’t been accrued. However, they may alter the method of dividing interest throughout the duration of a loan. This rule alters how you pay but will not impact the total amount you have to pay. It is among the principal tactics — and the basis for precomputed interest auto loans. Lenders add up all the months of the year which total 78, and then apply interest in reverse order. During a one-year loan it is possible to pay 12/78 of the total interest due in the initial 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 take care to pay off your loan earlier, however you won’t save as much than you could with a standard interest loan. Some states have banned rules like 78and it’s unlawful for loans lasting at least 61 months. Be sure to check your state’s laws to ensure that your lender doesn’t offer you an unconstitutional loan. How is an interest refund calculated for precomputed interest auto loans? They are calculated using subtracting the amount of interest you’ve been paying from interest remaining on your loan. But because the interest is frontloaded -that is, you pay a larger portion at the beginning of the loan and you’ll receive less money back the longer you wait to repay the loan. As an example, you’ll be paying around $4,800 in interest for the $30,000 loan with a 60-month repayment term with a 6 percent interest rate. If you pay your loan two years in advance it will be a two-year loan. The lender will add up all three of the years — multiplying 78 by three to come up with 234 then divide the result by 390, which is the rule of 78 divided over five years. The lender will have made 60 percent of its interest at this date. So you will receive a refund for the remaining 40 percent , totalling $1,920. Advantages and drawbacks of precomputed rates of interest Precomputed rate of interest is only an advantage in the event that you need be able to repay your loan in advance. In any other case, it will cost you the same as a standard interest loan. Advantages: Since precomputed interest favors the lender and the lender, they are much more likely to get offered to borrowers 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’s no distinction in how much interest you pay on a precomputed interest auto loan. If you stick 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 will pay more in interest if you repay your loan earlier and this means you will have lower savings and less responsible. Because lenders are limited to using the 78-day rule on loans with terms of sixty months and less, it is possible that you may be paying more monthly. If you only qualify for a precomputed interest auto loan, your loan might be more costly in the month.
What are the reasons you should stay clear of automated interest-based automobile loans In general, straightforward interest rates are the better option for almost every borrower. Even even if you’re not planning to pay back your loan in the near future the situation may change. In the event that it does, an easy interest loan will mean you pay lower overall. Since you pay higher interest at the start of a precomputed auto loan and you’ll lose savings if make a payment early. This may be just a small difference, but it’s still your money. The less you need to pay your lender, the better. The bottom line is that precomputed rates of auto loans are not a good idea however, they’re not the worst thing when you plan to pay minimum monthly payments. Still, you should 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 5 years experience working in the field of personal finance. She is also a full-time employee at the library in her town in which she assists the community gain access to information on financial literacy, in addition to other subjects.
Editor: Rhys Subitch Edited by Auto loans editor
Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers to take control of their finances with concise, well-studied information that breaks down complex topics into manageable bites.
Auto loans editor
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