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3 min read Published on October 17, 2022.

Authored by Kellye Guinan Written by Personal and business finance contributor

Kellye Guinan is a freelance editor and writer with over five years ‘ experience within personal financial matters. She also works full-time as a librarian at the local library in which she assists the community gain access to information on financial literacy, among other topics.

The edit was done by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to control their finances through providing clear, well-researched information that break down complex subjects into bite-sized pieces.

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Precomputed interest is a unique method of calculating the interest rate on an automobile loan which benefits the lender. Rather than spreading the interest evenly out over the course of the loan it is front-loaded — meaning that you pay more in than you would at the beginning of the loan and less towards the end. If you make minimum payments it is not a difference between and precomputed auto loans. You will get some money back if you repay the auto loan early however it’s smaller than that of a regular interest auto loan. What is a precomputed auto loan functions “Precomputed” means that the lender calculates the amount you will pay over the loan period. Then, it adds that rate of interest on top of the principle, and splits it into monthly payments as with standard auto loans which use interest that is simple. The method used to calculate interest benefits lenders if you repay early. They’re not as popular as simple interest loans. You are more likely to find them offered by buy-here-pay-here dealers and other lenders that are working in conjunction with bad credit borrowers. Due to this, they are more likely to charge higher interest rates. You will receive an interest rate as well as an annual percent rate that includes any additional fees. Precomputed interest is different from. simple interest. While precomputed interest is a way to front load what you pay divide the interest equally. Making more than the minimum cuts down on the principal amount, which means you pay less interest the next month. If you only make the minimum payment it won’t be a distinction between these two methods to calculate interest. But if you plan to pay off your auto loan in a short time, then simple interest loans are the better choice. This is the rule that applies to 78. Lenders aren’t legally permitted to charge you interest that isn’t earned. However, they are able to alter the method of dividing interest over the course of the course of a loan. The rule of 78 can alter how you pay but do not affect the total amount you pay. The is among the principal methods — and is the basis for precomputed auto loans. The lenders add all the months of the year which add up to 78, then apply interest in reverse order. For the course of a one-year loan you’d pay 12/78 of the total amount due in the first month. The second month would be 11/78, the 3rd month is 10/78, and the cycle continues. That means that you’ll pay more at the start and end of the loan. There is a chance to get a refund on interest when you take care to pay off your loan earlier, however you won’t save as much than you would with an interest loan. Some states have banned using rules like 78- and it is nationally illegal for loans lasting 61 months or longer. Examine the laws of your state to make sure your lender isn’t offering you an unconstitutional loan. How is an interest refund calculated for precomputed auto loans? Refunds are calculated by subtracting the amount of interest you’ve previously paid off from remaining interest on your loan. Because the interest is frontloaded -that is, you pay a larger amount at the beginning of the loan and you’ll have less refunded the longer you wait to complete the repayment of your loan. As an example, you’ll pay around $4,800 of interest for a $30,000 loan with a 60-month repayment term with a 6 percent interest rate. If you repay your loan two years in advance then the lender will add 3 years of interestmultiplying 78 by 3 to get 234 — then divide the result by 390, which is the standard of 78 divided over five years. The lender will have received 60 percent of the interest at this point. So you will receive a refund for the remaining 40 percent — totaling $1,920. Benefits and drawbacks of precomputed rates of interest Precomputed rate of interest is not a problem when you wish be able to repay your loan in advance. In any other case, it will cost the same as a simple interest loan. Benefits Since precomputed interest is beneficial to the lender it is much more likely to get provided to borrowers with less-than-perfect credit. If you aren’t eligible for a standard 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 the precomputed interest auto loan. If you follow the minimum payment plan, a precomputed interest loan is precisely like a standard interest loan.

Cons The major drawback with precalculated interest is that it can lead to early payments. It is more expensive to pay interest if you have to pay back your loan in advance and this means you will have lower savings and less responsible. Since lenders are only able to apply the 78 rule for loans that are 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, your loan might be more costly in the month.

Why you should avoid automated interest-based auto loans In general simple interest is the better choice for nearly every borrower. Even if you don’t have plans to pay off your loan at a later date it is possible that your situation will alter. And if it does, a straightforward interest loan could mean that you pay less overall. Because you pay more in interest at the start of an auto loan and you’ll lose savings if make a payment early. It could be an insignificant variation, but it’s your money. The less you need to pay your lender the less you pay, the better. The bottom line Precomputed interest auto loans are not a good idea however, they’re not the worst thing if you only plan to pay minimum monthly payments. Still, you should to look for 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 over 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 get information about financial literacy, in addition to other subjects.

Editor: 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 control their finances with clear, well-researched information that breaks down otherwise complicated topics into bite-sized pieces.

Auto loans editor

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