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What is a precomputed rate auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our goal is to help you make better financial choices by providing you with interactive financial calculators and financial tools, publishing original and objective content. We also allow you to conduct research and compare data for free 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 products that are featured on this website are provided by companies that compensate us. This compensation can affect the way and when products appear on the site, such as such things as the sequence in which they appear in the listing categories in the event that they are not permitted by law. Our loans, mortgage,, and other home lending products. This compensation, however, does not influence the information we publish, or the reviews that you read on this site. We do not include the universe of companies or financial offers that may be available 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 5 years experience working in the field of personal finance. She is also a full-time librarian at the local library where she helps her community get information on financial literacy, as well as other subjects.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to take control of their finances by providing concise, well-researched and well-studied content that breaks down complicated topics into digestible chunks.









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Precomputed interest is a unique way of calculating interest on an auto loan that benefits the lender. Rather than spreading the interest evenly out over the life of the loan it is a front-loaded one, which means you pay more rate at the start of your loan and less at the end. If you pay the minimum amount it is not a difference between and precomputed interest auto loans. There is a chance to get some money back if pay off the auto loan early, but it will be lower than a standard 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 splits it into monthly payments like standard auto loans which 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 regular interest loans. They are more likely to get them from buy-here-pay-here dealers and other lenders that are working with bad credit borrowers. Due to this, they typically have very high interest rates. The rate you pay will be the interest rate along with an annual percentage which includes any additional fees. Precomputed interest vs. simple interest While precomputed interest charges you upfront you, it is possible to split the interest evenly. Paying over the amount of your monthly payment reduces the principal amount, which in turn will mean you pay less interest the next month. If you only make the minimum amount, there won't be a distinction between these two methods to determine interest. If you intend to try to repay your auto loan quickly, simple interest loans are the best choice. This is the rule that applies to 78. Lenders are not legally allowed to charge you interest that hasn't accrued. However, they are able to alter the method of dividing interest over the course of a loan. This rule alters how you pay but not the total amount you pay. The is among the principal methods -- and is the basis for precomputed interest auto loans. Lenders add up all the months of the year, which is 78, and the interest is then applied in reverse. For a one-year loan it is possible to pay 12/78 of the interest due in the initial month. The second month will be 11/78, the third month is 10/78 and so on. This means that you'll have to pay more at the start the term of your loan. You can get a rebate on interest when you take care to pay off your loan early, though you won't save as much than you would with a simple interest loan. Some states have banned using rules like 78in addition, it's prohibited for loans lasting 61 months or longer. Be sure to 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 auto loans? Refunds are calculated by subtracting interest you have been paying from interest remaining on the loan. However, since the interest is frontloaded -- you pay a greater part at the start of the loan and you'll receive less money back the longer you wait to complete the repayment of your loan. For example, you will 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 earlier it will be a two-year loan. The lender will add the first three years -multiplying 78 by 3 to arrive at 234 then divide this number by 390 that's the principle of 78 divided over five years. The lender will have made 60 percent of its interest by this moment. Therefore, you'll receive an amount of refunding the remaining 40 percent , totalling $1,920. Advantages and drawbacks of precomputed rates of interest Precomputed rate of interest is only a drawback when you wish to pay off your loan early. In other cases, it'll cost you exactly the same as a standard interest loan. Pros Because precomputed interest benefits the lender it is much more likely to get provided to those who have less than perfect credit. If you don't qualify for a basic interest auto loan but you might be eligible for a precomputed interest loan. There is no difference in how much interest you pay on a precomputed interest auto loan. If you follow the minimum payment schedule, a precomputed interest loan is exactly the same as a simple interest loan.
Cons The major drawback with precalculated interest is the possibility of early repayments. It is more expensive to pay interest if you pay off your loan earlier, which means less savings to be financially responsible. Since lenders are only able to apply the 78 rule for loans that have 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, your loan may be more expensive from month to month.

The reasons to avoid the use of precalculating interest on automobile loans In general basic interest will be the ideal option for almost every borrower. Even even if you're not planning to repay your loan early now it is possible that your situation will change. If it does, a straightforward interest loan can mean you'll pay less in total. Because you pay more in interest at the start of a precomputed auto loan, you'll miss savings if make a payment early. This may be just an insignificant difference, but it's your money. The less you need to pay your lender, the more favorable. The bottom line Precomputed auto loans can be avoided however, they're not a bad thing if you only plan to make minimum payments. However, you must locate more lenders and potentially a better deal.


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Written by Business and personal finance Contributor

Kellye Guinan is a freelance editor and writer with over 5 years experience working in the field of personal finances. She also works full-time as a employee at the library in her town which she assists her local community to access information about financial literacy, as well as other subjects.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate from late 2021. They are committed to helping readers to control their finances by providing clear, well-researched information that is broken down into complicated subjects into digestible pieces.






Auto loans editor




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