Precomputed Interest
What is precomputed interest?
Precomputed interest means the lender calculates the loan's entire finance charge upfront, at signing, for the full term, and bakes that fixed dollar amount into the payment schedule — rather than charging interest daily on the shrinking balance. The practical effect: paying off early or making extra principal payments saves less than it would on a simple-interest loan. It shows up more often on subprime and deep-subprime (roughly 300 to 600 score) and buy-here-pay-here contracts.
Key takeaways
- Precomputed interest is calculated once, at signing, for the full loan term, then built into the fixed payment schedule — it is not recalculated daily the way simple interest is.
- Paying off a precomputed loan early, or making extra principal payments, generally saves less interest than the same move on a simple-interest loan, because the finance charge was already fixed.
- Rule of 78s is one specific method some precomputed contracts use to front-load how that fixed interest gets recognized across the term — it is a related but separate concept.
- Precomputed schedules show up more often in subprime, deep-subprime (roughly 300 to 600 score), and buy-here-pay-here financing than in mainstream bank or captive lending.
- The only reliable way to know which kind of loan you have is to read the contract or ask the servicer directly — both terms should be identifiable in the paperwork.
What is precomputed interest?
Precomputed interest is a method of calculating a loan's finance charge once, at signing, for the entire term — rather than letting interest accrue daily on whatever balance remains. The lender adds up the total interest the loan would generate over its full life and folds that fixed number into the payment schedule before you ever make a payment.
That single design choice changes how the loan behaves later, especially if you pay it off ahead of schedule.
How is precomputed interest different from simple interest?
Simple interest, which is how most everyday auto loans work, recalculates the interest owed every day based on the balance still outstanding. Pay extra principal, and tomorrow's interest is charged on a smaller number. Precomputed interest doesn't work that way — the total finance charge was already set before the first payment was made.
| Simple interest | Precomputed interest | |
|---|---|---|
| When interest is calculated | Daily, on the outstanding balance | Once, at signing, for the full term |
| Effect of paying off early | Directly reduces remaining interest owed | Reduces it by less — some of the fixed charge was already treated as earned |
| More common on | Mainstream bank, credit union, and captive-lender loans | Subprime, deep-subprime, and buy-here-pay-here contracts |
| How to identify it | Contract says "simple interest" or references the "actuarial method" | Contract says "precomputed" or "add-on interest," or references Rule of 78s |
Why does this matter if I pay off the loan early?
Because it directly changes how much an early payoff actually saves. On a simple-interest loan, every extra dollar of principal stops generating interest immediately — the math is straightforward and the savings are real. On a precomputed loan, part of that finance charge was already locked in at signing, so a payoff quote will typically return less than a simple day-by-day calculation would suggest.
This site's general guidance on paying off a car loan early assumes a simple-interest loan, which describes most mainstream auto financing. If your contract is precomputed instead, the interest-savings case is still often real, just smaller — the only way to know the actual number is to request a written payoff quote and compare it to what you'd expect under a simple day-by-day calculation.
How do I find out which one I have?
Two reliable sources. First, read the retail installment contract itself — "simple interest" and "precomputed" are both terms that should appear somewhere in the financing paperwork, sometimes in the fine print near the finance charge disclosure. Second, call the servicer directly and ask the plain question: is this loan simple interest or precomputed?
Do not assume based on the lender type alone. While precomputed schedules are more common on subprime and buy-here-pay-here paper, plenty of smaller lenders in that space still use simple interest, and the only certain answer is in your own contract.
Precomputed interest and Rule of 78s
A related but separate concept worth knowing: Rule of 78s is one specific method some precomputed contracts use to spread that fixed interest unevenly across the term, weighted toward the early months. Not every precomputed loan uses Rule of 78s, but every Rule of 78s loan is a precomputed loan — it's worth reading both entries if your contract mentions either term.
Common questions
What is precomputed interest on a car loan?
It's a method where the lender calculates the total finance charge for the entire loan term at signing, then builds that fixed dollar amount into the payment schedule — instead of charging interest daily on the declining balance the way a simple-interest loan does.
Does paying off a precomputed loan early save money?
Some, but less than on a simple-interest loan. Because the total interest was fixed at signing rather than accruing daily, an early payoff or extra principal payment doesn't reduce the finance charge the same way. Check the contract's payoff clause to see exactly how much comes back.
How do I know if my loan is simple interest or precomputed?
Check the retail installment contract, or call the servicer and ask directly: is this loan simple interest or precomputed? Both terms should appear somewhere in the paperwork. Most mainstream auto loans are simple interest; precomputed schedules are more common on subprime and buy-here-pay-here contracts.
Is precomputed interest the same as Rule of 78s?
No. Precomputed interest is the broader category — a fixed finance charge set at signing. Rule of 78s is one specific method some precomputed contracts use to front-load how that interest gets recognized across the term, which makes early payoff even less rewarding.
Is precomputed interest illegal?
No, precomputed interest itself is legal nationwide. What's restricted is the Rule of 78s method specifically, and only on longer loans — federal law bans it on consumer loans over 61 months, and some states add their own limits on shorter contracts too.