What is a Precomputed Loan?

Posted: Thursday, January 25th, 2018

In a precomputed loan, the interest on the loan is calculated at the beginning of the financing process. Unlike a simple interest loan, it isn’t calculated on a monthly basis. If you’re considering a precomputed loan, keep the following information in mind:

  • A precomputed loan includes the total amount financed, interest, and any other fees.
  • If you pay off your loan early, you’ll receive an interest refund, although you might save more money with a simple interest loan.
  • If you make a payment late, your interest might not increase, but you’ll be charged a late fee.

Find out today if a precomputed loan is the right choice for you!

Advantages of a Precomputed Loan

The biggest benefit of a precomputed loan is that you have a clear picture of your payments for the future. With a simple interest loan, your interest is calculated every month, so it will change over the life of the loan. However, if you choose a precomputed loan, you’ll receive a clear payment schedule, and the payments will be the same every month. If you’d prefer a consistent payment plan, a precomputed loan may be right for you.

Precomputed Loan Example

The precomputed interest formula is the same as the formula used to determine the initial interest rate on a simple interest loan. As we noted, the big difference is that once the precomputed interest rate is determined, it remains the same for the full length of the loan. The starting account balance for a precomputed loan is comprised of the amount to be financed, the origination fee (a fee charged by the lender for drawing up the loan), and the precomputed interest rate. Here is a precomputed loan example to illustrate how it works:

Precomputed Loan Example

  • Say the amount to be financed is $3,000, with an origination fee of $200 and precomputed interest totaling $1,000.
  • After adding these numbers together, the initial account balance is $4,200.
  • The monthly payment amount is then determined by the loan term. If the loan term is 24 months, the monthly payment amount would be $175.

Is a Simple Interest Loan Better for my Needs?

A simple interest loan is one of the most common types of car loans, and it offers the following advantages:

  • Making payments early decreases the overall financing costs you’ll pay for the loan.
  • As with a precomputed loan, you’ll receive up-front information on fees and how much you’ll pay on interest.
  • If you plan to pay off your vehicle early, a simple interest loan will likely save you money.

As you can see, the main advantage of a simple interest loan is for drivers who pay off their loan early. If you’re planning to make consistent monthly payments over the life of a loan, a precomputed loan is likely a stronger choice.

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Where Can I Find a Precomputed Auto Loan?

At Green Light Auto Credit, we can help you decide if a precomputed or a simple interest loan is a better choice for your financing needs. In addition to providing in-depth information on precomputed loans and the precomputed interest formula, we offer the following advantages over other financing providers:

Contact us today to get the ball rolling on a precomputed auto loan!