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What is a precomputed rate auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our aim is to assist you make better financial decisions by providing you with interactive financial calculators and financial tools as well as publishing high-quality and impartial content, by enabling you to conduct research and compare information at no cost to help you make sound 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 deals that are advertised on this website are provided by companies that pay us. This compensation could affect how and when products appear on this site, including, for example, the order in which they may appear in the listing categories and other categories, unless prohibited by law for our mortgage, home equity and other home loan products. This compensation, however, does affect the information we provide, or the reviews that appear on this website. We do not include the universe of companies 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 ' experience within personal finances. She also works full-time as a employee at the library in her town in which she assists the community access information about 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 passionate about helping readers gain confidence to control their finances with concise, well-researched and well-studied content that breaks down complicated topics into digestible chunks.









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Precomputed Interest is a rare method of calculating the interest rate on an automobile loan that is beneficial to the lender. Rather than spread the interest out over the course of the loan it is front-loaded -- meaning that you pay more in interest at the beginning of the loan and less at the end. If you only make the minimum payments and do not make any distinctions between the precomputed auto loans. There is a chance to get some money back if you pay off the auto loan in advance however, it's smaller than that of a regular auto loan. What is a precomputed auto loan operates "Precomputed" means that the lender calculates the interest you'll pay over the loan duration. It then adds the amount to your principal amount and divides it into monthly payments as with standard auto loans which use interest that is simple. The way interest is calculated favors lenders when you pay early. They aren't as common as regular interest loans. It is more likely that you will get them from buy-here-pay-here dealers as well as other lenders who are working with bad credit borrowers. Because of this, they tend to have very high interest rates. The rate you pay will be an interest rate as well as an annual percent rate which includes any additional charges. Precomputed interest vs. simple interest. Precomputed interest is a way to front load what you pay, split the interest paid equally. Paying higher than your minimum payment decreases the principal amount, which in turn results in a lower interest rate each month. If you only make the minimum amount it won't be a distinction between the two methods to determine interest. But if you plan to pay off your auto loan quickly, simple interest loans are the best option. This is the rule that applies to 78. Lenders aren't legally permitted to charge you interest which isn't earned. But they can change the way interest is divided across the duration of a loan. This rule alters the way you pay, but will not impact the total amount you pay. It is among the most popular tactics -- and the basis for precomputed interest auto loans. The lenders add all the months in the year, which total 78, and then apply interest in reverse order. For an one-year loan, you would be paying 12/78 on the total interest due in the first month. The second month is 11/78, the third month is 10/78 and on and so forth. This means you will be paying more at the beginning of your loan. There is a chance to get a refund on interest if you take care to pay off your loan in advance, but it won't be as effective than you could with a standard interest loan. Certain states have prohibited rules like 78- and it is nationally illegal for loans lasting 61 months or longer. Be sure to check your state's laws to make sure your lender isn't offering you an illegal loan. What is the method by which interest refunds are calculated for precomputed auto loans? They are calculated using subtracting interest you have already paid from the balance of interest on your loan. But because the interest is frontloadedwhich means you pay a higher amount at the beginning of the loan and you'll receive less money back the longer you take to pay off your loan. As an example, you'll pay around $4,800 of interest on a $30,000 loan with 60-month repayment terms with a 6 percent interest rate. If you repay your loan two years in advance, the lender will add up all three of the years- multiplying 78 by three to come up with 234 then divide this number by 390 which is the rule of 78 spread 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 -- totaling $1,920. Benefits and disadvantages of precomputed interests Precomputed interest is not a problem if you want you to settle your loan in advance. In any other case, it will cost you exactly the same as a standard interest loan. Pros Because precomputed interest benefits the lender and the lender, they are more likely to be provided to those who have less than perfect credit. If you're not eligible for a standard interest auto loan, you may still be approved for an interest-only precomputed loan. There's no difference in the amount of interest you pay for a precomputed interest auto loan. If you adhere to the minimum repayment schedule, a precomputed interest loan is exactly like a standard interest loan.
Cons The major drawback with precalculated interest is the possibility of early repayments. You'll pay more interest if you have to pay back your loan early and this means you will have lower savings and less responsible. Since lenders can only use the 78-day rule on loans with terms of 30 months or more, you may pay more in monthly installments. If you're only qualified for a precomputed auto loan, your loan might be more costly from month to month.

Why you should avoid automated interest-based automobile loans In general simple interest is the ideal option for most borrowers. Even if you don't have plans to repay your loan in the near future it is possible that your situation will change. And if it does, an easy interest loan could mean that you pay lower overall. Because you pay more in interest in the beginning of an auto loan you'll be missing savings if repay early. It could be an insignificant difference, but it's your money. The less you have to pay your lender, the better. The bottom line is that precomputed auto loans are avoidable however, they're not a bad 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 five years ' experience within personal finances. She is also a full-time employee at the library in her town where she helps her community gain access to information on financial literacy, as well as other topics.



Edited 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 to manage their finances with clear, well-researched information that breaks down otherwise complicated subjects into digestible pieces.






Auto loans editor




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