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How do I calculate a fixed interest auto loan? Advertiser Disclosure Advertiser Disclosure We are an independent, advertising-supported comparison service. Our mission is to help you make better financial choices by providing you with interactive financial calculators and tools that provide objective and original content, by enabling you to conduct research and compare information for free - so that you can make informed financial decisions. Bankrate has partnerships with issuers including, but not limited to American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Earn Money The products that are featured on this site come from companies who pay us. This compensation can affect the way and where products appear on this site, including such things as the order in which they may be listed within the categories of listing, except where prohibited by law. This applies to our mortgage, home equity, and other home loan products. This compensation, however, does affect the content we publish or the reviews that appear on this website. We do not cover the universe of companies or financial offerings that could be open 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 who has more than five years of experience in personal finance. She's also a full-time worker at her local library in which she assists the community get information on financial literacy, among other topics.







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 readers gain the confidence to control their finances through providing concise, well-researched and well-studied content that break down complex subjects into bite-sized pieces.









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Precomputed interest is a unique method of calculating interest 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 interest at the beginning of the loan and less at the end. If you only make the minimum payments it is not a difference between pre-calculated auto loans. You will get some money back if pay off your auto loan early however, it's smaller than that of a regular interest auto loan. What is a precomputed auto loan operates "Precomputed" means that the lender calculates the amount that you'll be paying over the loan period. It then adds the amount to your principal and divides it into monthly installments like traditional auto loans that use simple interest. The method of calculating interest benefits lenders if you repay early. They're not as popular as simple interest loans. You are more likely to see them offered by buy-here, pay-here dealers as well as other lenders who deal on behalf of bad credit borrowers. Due to this, they typically have higher interest rates. You'll receive an interest rate as well as an annual percent rate which includes any additional fees. Precomputed interest vs. simple interest. Precomputed interest front-loads what you pay divide the interest equally. If you pay over the amount of your monthly amount decreases the principal amount, which, in turn, means you pay less interest in the following month. If you only make the minimum payment then there will be no distinction between these two methods to determine interest. However, if you are planning to pay off your auto loan in a short time, then simple interest loans are the best option. This is the rule that applies to 78. Lenders aren't legally permitted to charge interest that hasn't accrued. However, they are able to alter how interest is distributed across a loan. This rule alters how you but not the amount you pay. The is among the principal strategies -- and also the foundation for precomputed interest auto loans. The lenders add all the months of the year, which is 78, and the interest is then applied in reverse. In 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 is 11/78, the 3rd month is 10/78, and the cycle continues. This means you will be paying more at the beginning and end of the loan. You can get a rebate on interest if you pay off your loan in advance, but you won't save as much as you would with a simple interest loan. Some states have banned using rules like 78and it's prohibited for loans that last at least 61 months. Examine the laws of your state to ensure your lender isn't providing you with an illegal loan. What is the method by which interest refunds are calculated for precomputed interest 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 frontloaded -which means you pay a higher portion at the beginning of the loan and you'll receive less money back the longer you take to repay your loan. For instance, you'll pay about $4,800 in interest for the $30,000 loan with 60-month repayment terms and a 6 percent interest rate. If you repay your loan two years early, the lender will add the first three years- multiplying 78 by three to arrive at 234 then divide this number by 390 which is the standard of 78 spread over five years. The lender will have made 60 percent of its interest by this point. This means you'll get the remainder of the 40%, which is $1,920. Benefits and disadvantages of precomputed interest Precomputed interest is only an advantage in the event that you need be able to repay your loan in advance. In other cases, it'll cost the same amount as a regular interest loan. Advantages: Since precomputed interest favors the lender it is most likely to be provided to those with less than perfect credit. If you don't qualify for a basic interest auto loan however, you could still be approved for an interest-only precomputed loan. There's no distinction in the amount of interest you pay on the precomputed interest auto loan. If you stick to the minimum repayment schedule, a precomputed interest loan is exactly like a standard interest loan.
Cons The major drawback with precalculated interest is the possibility of early repayments. You will pay more in interest if you have to pay back your loan early and this means you will have less savings to be financially responsible. Because lenders are limited to using the 78-day rule on loans with terms of 30 months or more, you could have higher monthly payments. If you're only qualified for a precomputed-interest auto loan and you are not eligible for precomputed interest auto loans, your loan might be more costly between months.

What are the reasons you should stay clear of precomputed interest auto loans In general, simple interest is the best option for most borrowers. Even when you don't plan to pay back your loan in the near future it is possible that your situation will alter. If it does, a simple interest loan could mean that you pay less overall. Because you pay more interest when you first take out a precomputed auto loan, you'll miss the savings if you repay in a timely manner. This may be just an insignificant difference, but it's still your money. The less you have to pay your lender, the more favorable. The bottom line is that precomputed interest auto loans are not a good idea, but they also are not the worst thing for those who only intend to make minimum payments. However, you must find more lenders -- and, if you are lucky, a better deal.


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Written by Business and personal finance contributor

Kellye Guinan is a freelance editor and writer with over five years of experience in personal financial matters. She is also a full-time librarian at the local library where she helps her community get information about financial literacy, in addition to 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 passionate about helping readers gain the confidence to manage their finances by providing concise, well-studied information that is broken down into complicated topics into bite-sized pieces.






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