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What is a precomputed 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 providing you with interactive financial calculators and tools, publishing original and objective content. This allows you to conduct research and compare information for free to help you make sound 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 Money The deals that are advertised on this site come from companies who pay us. This compensation may impact how and where products appear on the site, such as such things as the order in which they appear in the listing categories, except where prohibited by law for our mortgage, home equity, and other home loan products. However, this compensation will not influence the information we provide, or the reviews that you see on this site. We do not cover 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 who has more than 5 years experience working in the field of personal financial matters. She also works full-time as a employee at the library in her town where she helps her 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 writing and editing for Bankrate since the end of 2021. They are passionate about helping readers gain the confidence to manage their finances with clear, well-researched information that breaks down complicated topics into manageable bites.
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Precomputed interest is an uncommon way of calculating rates on an auto loan that benefits the lender. Rather than spreading the interest evenly out over the life of the loan, the interest is a front-loaded one, which means that you pay more in rate at the start of your loan and less at the end. If you only make the minimum payments, there is no difference between the precomputed auto loans. You will get some money back if you repay your auto loan early however, it’s less than with a simple interest auto loan. What is a precomputed auto loan operates « Precomputed » means the lender determines the amount of interest you’ll pay over the loan term. It then adds the interest to the principal, and divides it into monthly installments as with regular auto loans which use interest that is simple. The method used to calculate interest is advantageous to lenders if you are able to pay early. They’re not as widespread as traditional interest loans. It is more likely that you will see them offered by buy-here, pay-here dealers and other lenders that deal with bad credit borrowers. This is why they are more likely to charge high interest rates. You’ll receive the interest rate along with an annual percentage which includes any additional fees. Precomputed interest in comparison to. simple interest While precomputed interest front-loads what you pay divide the interest equally. Paying more than the minimum payment reduces the principal, which in turn results in a lower interest rate each month. If you only make the minimum amount, there won’t be a distinction between these two methods to determine interest. But if you plan to try to repay your auto loan quickly, interest-only loans are the best option. It is a rule of law that says 78. Lenders are not legally allowed to charge you interest which hasn’t accrued. But they can change the method of dividing interest across a loan. The rule of 78 alters how you but will not impact the total amount you pay. The is among the principal methods — and is the basis for precomputed interest auto loans. Loan lenders add up all months in the year, which add up to 78, then apply interest in reverse order. For an one-year loan you’d pay 12/78 of the total amount due in the initial month. The second month would be 11/78, the third month is 10/78, and on and so forth. This means that you’ll have to pay more at the start of your loan. You can get a rebate on interest if you repay your loan in advance, but you won’t save as much as you would with an interest loan. Certain states have prohibited rules like 78 -and it’s unlawful for loans lasting at least 61 months. Examine the laws of your state to ensure that your lender isn’t providing you with an unconstitutional loan. What is the method by which interest refunds are calculated for precomputed auto loans? The refunds can be calculated as a result of subtracting the amount of interest you have been paying from interest remaining on the loan. However, since the interest is frontloadedwhich means you pay a higher portion at the beginning of the loan and you’ll have less refunded the longer you have to complete the repayment of your loan. For instance, you’ll be paying around $4,800 in interest for an $30,000 loan with 60-month term of repayment and a 6-percent interest rate. If you pay your loan two years in advance it will be a two-year loan. The lender will add up 3 years of interest- multiplying 78 by three to get 234 — then divide this number by 390 that’s the principle of 78 spread across five years. The lender has received 60 percent of the interest at this point. Therefore, you’ll receive an amount of refunding the remaining 40 percent , totalling $1,920. Advantages and drawbacks of precomputed interests Precomputed interest is only a drawback when you wish to pay off your loan early. In other cases, it’ll cost you the same amount as a regular interest loan. Advantages: Since precomputed interest favors the lender and the lender, they are much more likely to get offered to those with less than perfect credit. If you’re not eligible for a basic interest auto loan, you may still be able to get precomputed interest loan. There’s no difference in how much interest you pay with the precomputed interest auto loan. If you adhere to the minimum repayment schedule, a precomputed interest loan is the same as a simple interest loan.
Cons The major drawback with precomputed interest is early payments. You’ll pay more interest if you have to pay back your loan early, which means less savings to be financially responsible. Since lenders can only use the 78-day rule on loans that are 30 months or more, you might pay more in monthly installments. If you are only eligible for a precomputed auto loan and you are not eligible for precomputed interest auto loans, your loan could be more expensive in the month.
What are the reasons you should stay clear of precomputed interest car loans In general, straightforward interest rates are the best option for most borrowers. Even even if you’re not planning to pay off your loan at a later date, your situation could change. And if it does, a simple interest loan can mean you’ll pay lower overall. Because you pay more interest at the start of a precomputed auto loan and you’ll lose the savings if you pay off your loan in a timely manner. This may be just only a tiny difference, but it’s your money. The lower the amount you must pay your lender and the lower your monthly payments, the more favorable. The bottom line is that precomputed interest auto loans can be avoided however, they’re not the worst thing if you only plan to make minimum payments. However, you must locate more lenders and possibly a better rate.
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 worker at her local library which she assists her local community to gain access to information on financial literacy, among other subjects.
Edited by Rhys Subitch Edited by Auto loans editor
Rhys has been writing and editing for Bankrate from late 2021. They are dedicated to helping their readers gain the confidence to control their finances through providing precise, well-researched and well-understood information that breaks down otherwise complicated subjects into digestible pieces.
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