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What exactly is a calculated 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 offering interactive financial calculators and tools, publishing original and objective content. We also allow you to conduct your own research and compare data for free to help you make financial decisions with confidence. Bankrate has agreements with issuers such as, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money The offers that appear on this site are from companies that compensate us. This compensation can affect the way and when products appear on this website, for example such things as the sequence in which they appear within the listing categories in the event that they are not permitted by law. This applies to our loan products, such as mortgages and home equity and other home lending products. But this compensation does not influence the content we publish or the reviews that you read on this site. We do not contain the entire universe of businesses or financial deals that could be accessible to you.



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3 min read . Published on October 17, 2022.
Writer: Kellye Guinan Written by Personal and Business Finance Contributor

Kellye Guinan is a freelance editor and writer with more than five years of experience in personal finances. She also works full-time as a employee at the library in her town where she helps her community get information on financial literacy, in addition to other subjects.







Editor: 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 by providing clear, well-researched information that breaks down otherwise complex topics into digestible chunks.









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Precomputed Interest is a rare method of calculating the the interest rate on an automobile loan that benefits the lender. Instead of spreading the interest evenly out over the life of the loan it is front loaded, meaning you pay higher interest at the beginning of the loan and less at the conclusion. If you only make the minimum payments, there is no difference between pre-calculated auto loans. You will get some money back if you pay off your auto loan in advance however it's smaller than that of a regular auto loan. The way a precomputed interest auto loan works "Precomputed" is the term used to describe how the lender calculates the amount that you'll be paying over the loan term. It then adds the amount to your principal amount and divides it into monthly payments like regular auto loans that use simple interest. The way interest is calculated benefits lenders if you repay early. They're not as popular as traditional interest loans. You are more likely to find them offered by buy-here-pay-here dealers and other lenders that are working with bad credit borrowers. Due to this, they are more likely to charge very high interest rates. You will receive the interest rate along with an annual percentage rate which also includes any additional fees. Precomputed interest is different from. simple interest While precomputed interest front-loads what you pay you, it is possible to split the interest evenly. Paying more than the minimum amount decreases the principal, which results in a lower interest rate the next month. If you just make the minimum amount of payment then there will be no difference between these two ways to determine interest. If you intend to try to repay your auto loan quickly, interest-only loans are the better choice. It is a rule of law that says 78. Lenders aren't legally permitted to charge interest that isn't earned. However, they are able to alter how interest is distributed across a loan. A rule called 78 changes how you but not the total amount you have to pay. This is among the principal strategies -- and also the foundation for precomputed interest auto loans. The lenders add all the months of the year which add up to 78, they then calculate interest using reverse-order. During a one-year loan it is possible to have to pay 12/78 percent of total amount due in the first month. The second month would be 11/78, the 3rd month is 10/78 and on and so forth. This means you will have to pay more in the beginning of your loan. You may be eligible for a discount on interest if you pay off your loan early, though you won't save as much than you would with an interest loan. Certain states have prohibited rules like 78 -and it's prohibited for loans lasting at least 61 months. Be sure to check your state's laws to make sure your lender isn't providing you with an unconstitutional loan. How is an interest refund calculated for precomputed interest auto loans? They are calculated using subtracting interest you've previously paid off from balance of interest on the loan. Because the interest is frontloaded -that is, you pay a larger portion at the beginning of the loan -- you will be able to receive less in the time you take to repay the loan. As an example, you'll be paying around $4,800 in interest for a $30,000 loan with 60-month term of repayment and a 6-percent interest rate. If you pay off your loan two years in advance then the lender will add up all three of the yearsmultiplying 78 times three to get 234 -- then divide the result by 390, which is the rule of 78 divided over five years. The lender has earned 60 percent of its interest by this moment. This means you'll get an amount of refunding the remaining 40 percent , totalling $1,920. Benefits and disadvantages of precomputed interests Precomputed interest is only a drawback if you want be able to repay your loan in advance. In any other case, it will cost the same as a standard interest loan. Pros Because precomputed interest benefits the lender, they are much more likely to get granted to borrowers with less-than-perfect credit. If you don't qualify for a basic interest auto loan, you may still be eligible for an interest-only precomputed loan. There's no distinction in the amount of interest you pay with the precomputed interest auto loan. If you adhere to the minimum repayment schedule, a precomputed interest loan is exactly the same as a simple interest loan.
Cons The main drawback of 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 earlier that means less savings for being financially responsible. Because lenders are limited to using the rule of 78 on loans that are 60 months or less, you might pay more in monthly installments. If you only qualify for a precomputed auto loan, your loan might be more costly from month to month.

Why you should avoid precomputed interest auto loans In general, simple interest is the better option for most borrowers. Even when you don't plan to pay back your loan at a later date it is possible that your situation will alter. In the event that it does, an easy interest loan could mean that you pay lower overall. Since you pay higher interest when you first take out a precomputed auto loan you'll be missing the savings if you repay in a timely manner. It could be only a tiny difference, but it's still your money. The lower the amount you must pay your lender, the more favorable. The bottom line Precomputed interest auto loans are avoidable however, they're not a bad thing when you plan to pay minimum monthly payments. However, you must locate more lenders and possibly a better rate.


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Written by Personal and business finance Contributor

Kellye Guinan is a freelance editor and writer with over five years of experience in personal finances. She also works full-time as a employee at the library in her town in which she assists the community 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 writing and editing for Bankrate from late 2021. They are committed to helping readers to manage their finances through providing concise, well-studied information that breaks down complicated topics into bite-sized pieces.






Auto loans editor




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