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What exactly is a calculated interest 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 that provide objective and original content, by enabling you to conduct research and compare data for free and help you make informed financial decisions. Bankrate has agreements with issuers such as, but not restricted 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 pay us. This compensation could affect how and when products appear on this site, including, for example, the order in which they may appear within the listing categories and other categories, unless prohibited by law. This applies to our loan products, such as mortgages and home equity and other home loan products. However, this compensation will affect the information we publish, or the reviews that you see on this site. 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 with more than 5 years experience working in the field of personal finance. She also works full-time as a worker at her local library in which she assists the community get information on financial literacy, as well as other subjects.







Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are dedicated to 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 manageable bites.









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Precomputed interest is an uncommon method of calculating the rates on an auto loan that is beneficial to the lender. Instead of dispersing the interest equally over the life of the loan, the interest is a front-loaded one, which means that you pay more in than you would at the beginning of the loan and less at the conclusion. If you pay the minimum amount, there is no difference between and precomputed interest auto loans. There is a chance to get some money back if pay off the auto loan in advance however, it's lower than a standard interest auto loan. The way a precomputed interest auto loan operates "Precomputed" means that the lender determines the amount of interest you'll pay over the loan duration. It then adds this interest to the principal and splits it into monthly payments, similar to traditional auto loans that use simple interest. The method of calculating interest favors lenders when you pay early. They aren't as common as simple interest loans. They are more likely to see them offered by buy-here, pay-here dealers as well as other lenders who deal in conjunction with bad credit borrowers. Due to this, they are more likely to charge higher interest rates. The rate you pay will be 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 charges you upfront you, it is possible to split the interest equally. Paying over the amount of your monthly reduces the principal amount, which in turn results in a lower interest rate each month. If you only make the minimum payment it won't be a distinction between the two methods to determine interest. However, if you are planning to try to repay your auto loan in a short time, then simple interest loans are the best choice. The rule of 78 Lenders are not legally allowed to charge you interest that isn't earned. However, they are able to alter how interest is distributed across the duration of a loan. The rule of 78 can alter how you but will not impact the amount you pay. This is among the principal tactics -- and the foundation for precomputed interest auto loans. The lenders add all the months in the year, which is 78, and then apply interest in reverse order. In the course of a one-year loan, you would have to pay 12/78 percent of total interest due in the first month. The second month is 11/78, and the third month is 10/78, and so on. This means you will be paying more at the beginning the term of your loan. You can get a rebate on interest when you 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 -in addition, it's prohibited for loans lasting 61 months or longer. Check your state's laws to ensure that your lender isn't offering you an illegal loan. How is an interest refund calculated for precomputed auto loans? They are calculated using subtracting the amount of interest you have previously paid off from balance of interest on the loan. However, since the interest is a frontloaded charge -that is, you pay a larger part at the start of the loan and you'll receive less money back the longer you have to complete the repayment of your loan. For example, you will pay about $4,800 in interest on a $30,000 loan with 60-month repayment terms with a 6 percent interest rate. If you pay off your loan two years in advance then the lender will add 3 years of interest -multiplying 78 by 3 to get 234 -- then divide the result by 390, which is the standard of 78 spread across five years. The lender will have earned 60 percent of its interest at this moment. So you will receive a refund for the remaining 40 percent , totalling $1,920. Benefits and drawbacks of precomputed interests Precomputed interest is only a drawback in the event that you need to pay off your loan in advance. In any other case, it will cost you the same as a standard interest loan. Advantages: Since precomputed interest favors the lender, they are much more likely to get provided to those with less than perfect credit. If you don't qualify for a standard interest auto loan, you may still be eligible for a precomputed interest loan. There is no difference in the amount of interest you pay for the precomputed interest auto loan. If you stick to the minimum payment plan, a precomputed interest loan is exactly like a standard interest loan.
Cons The main drawback of 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 for being financially responsible. Because lenders are limited to using the 78-day rule on loans that are sixty months and less, it is possible that you could pay more in monthly installments. If you're only qualified for a precomputed interest auto loan then your loan might be more costly from month to month.

Why you should avoid automated interest-based car loans In general basic interest will be the ideal choice for nearly every borrower. Even when you don't plan to pay off your loan in the near future, your situation could alter. And if it does, an easy interest loan can mean you'll pay less overall. Because you pay more interest at the start of a precomputed auto loan and you'll lose out on savings if you make a payment early. It could be only a tiny difference, but it's your money. The lower the amount you must pay your lender the less you pay, the better. The bottom line is that precomputed interest auto loans are avoidable however, they're not the most ideal option if you only plan to pay minimum monthly payments. But, it is important to find more lenders -- and potentially a better deal.


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Written by Personal and business finance Contributor

Kellye Guinan is a freelance editor and writer who has more than five years of experience in personal finance. She's also a full-time librarian at the local library which she assists her local community to gain access to information on financial literacy, in addition to other topics.



Edited by Rhys Subitch Edited by Auto loans editor

Rhys has been editing and writing for Bankrate since the end of 2021. They are committed to helping readers to take control of their finances by providing concise, well-studied information that breaks down complicated subjects into digestible pieces.






Auto loans editor




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