What's the difference between a simple interest rate and precomputed interest in an auto loan contract?

Simple interest and precomputed interest are different ways to calculate your interest due. The simple interest method uses the amount or actual balance outstanding on the day your payment is due. If you pay more than your monthly payment, this amount should get smaller as you pay down your loan. The precomputed interest method always uses the original payment schedule to figure interest, even if you make payments early.

If you have a contract with precomputed interest and plan to pre-pay your loan early in full or make larger payments in advance of your regularly scheduled amount, you will not get the same reduction in the interest charges that you would if your contract had a simple interest rate. If you pay on time for each payment over your loan term, there is little difference between simple and precomputed interest.

TIP:

If you think there’s a possibility you may want to pre-pay your loan in full or pay more than what you owe to pay your loan off earlier, a loan with precomputed interest may not make the most financial sense for you. Precomputed interest is generally not used by banks and credit unions. Some lenders may offer precomputed interest and others may not. Shop around and compare multiple offers.

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