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What is a precomputed rate 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 providing you with interactive tools and financial calculators as well as publishing high-quality and impartial content. We also allow you to conduct research and compare information at no cost to help you make informed financial decisions. Bankrate has partnerships with issuers such as, but not restricted to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Profit The offers that appear on this site come from companies who pay us. This compensation could affect how and where products appear on this site, including such things as the order in which they appear within the listing categories and other categories, unless prohibited by law for our mortgage, home equity, and other home lending products. However, this compensation will have no impact on the content we publish or the reviews you read on this site. We do not include the vast array of companies or financial offerings that could be open to you.
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3 minutes 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 worker at her local library where she helps her community get 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 from late 2021. They are passionate about helping readers gain confidence to manage their finances with precise, well-studied information that break down complex topics into digestible chunks.
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Precomputed interest is a unique way of calculating rates on an auto loan that benefits the lender. Instead of dispersing the interest equally throughout the duration of the loan the interest is front-loaded — meaning you pay higher rate at the start of your loan and less at the end. If you pay the minimum amount, there is no difference between the precomputed interest auto loans. There is a chance to get some money back if pay off your auto loan in advance however it’s smaller than that of a regular auto loan. What is a precomputed auto loan functions «Precomputed» means the lender calculates the interest that you’ll be paying over the loan duration. It then adds this interest to the principal and divides it into monthly installments like standard auto loans which use interest that is simple. The way interest is calculated benefits lenders if you repay early. They’re not as widespread as simple interest loans. It is more likely that you will get them from 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 charges. Precomputed interest is different from. 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 payment reduces the principal, which in turn means you pay less interest the next month. If you make only the minimum amount of payment then there will be no distinction between these two methods to calculate interest. But if you plan to pay off your auto loan quickly, simple interest loans are the best option. The rule of 78 Lenders aren’t legally permitted to charge interest that hasn’t accrued. However, they may alter the way interest is divided across the course of a loan. The rule of 78 changes the way you pay, but do not affect the total amount you have to pay. The is among the principal strategies — and also the basis for precomputed auto loans. Lenders add up all the months of the year, which is 78, and the interest is then applied in reverse. For an one-year loan it is possible to have to pay 12/78 percent of interest due in the initial month. The second month will be 11/78, and the third month is 10/78, and so on. That means that you’ll have to pay more in the beginning the term of your loan. You may be eligible for a discount on interest if you take care to pay off your loan earlier, however you won’t save as much than you would with a simple interest loan. Some states have banned using the rule of 78 -and it’s illegal for loans that last more than 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 auto loans? They are calculated using subtracting the amount of interest you’ve been paying from remaining interest on the loan. However, since the interest is a frontloaded charge — you pay a greater part at the start of the loan and you’ll be able to receive less in the time you wait to repay the loan. For instance, you’ll pay about $4,800 in interest for a $30,000 loan with 60-month term of repayment with a 6 percent interest rate. If you pay off your loan two years early then the lender will add up 3 years of interest — multiplying 78 by three to get 234 — then divide that number by 390, which is the standard of 78 spread across five years. The lender will have received 60 percent of the interest at this moment. This means you’ll get an amount of refunding the remaining 40%, which is $1,920. Benefits and disadvantages of precomputed interest Precomputed interest is only an advantage in the event that you need you to settle your loan early. Otherwise, it will cost you the same as a standard interest loan. Benefits Since precomputed interest is beneficial to the lender and the lender, they are most likely to be provided to borrowers with less-than-perfect credit. If you’re not eligible for a basic interest auto loan however, you could still be eligible for precomputed interest loan. There is no difference in the amount of interest that you pay with an auto loan. If you follow the minimum payment schedule and you are able to calculate the interest, a precomputed loan is the same as a simple interest loan.
Cons The main drawback of precomputed interest is early payments. It is more expensive to pay interest if you have to pay back your loan in advance, which means lower savings and less responsible. Since lenders can only use the 78-day rule on loans that are 60 months or less, you could be paying more monthly. If you’re only qualified for a precomputed auto loan then your loan might be more costly in the month.
What are the reasons you should stay clear of the use of precalculating interest on auto loans In general, straightforward interest rates are the ideal option for almost every borrower. Even if you don’t have plans to pay back your loan early now it is possible that your situation will change. In the event that it does, an easy interest loan will mean you pay less in total. Since you pay higher interest in the beginning of an auto loan you’ll be missing savings if repay early. This may be just a small difference, but it’s 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, but they also are not the worst thing if you only plan to pay minimum monthly payments. However, you must locate more lenders and possibly a better rate.
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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 financial matters. She is also a full-time librarian at the local library in which she assists the community get information about financial literacy, among other subjects.
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 gain the confidence to control their finances through providing clear, well-researched information that breaks down complicated subjects into digestible pieces.
Auto loans editor
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