 TITLE: What Is a Precomputed Interest Loan? CONTENT: Pros and Cons of Precomputed Interest Loans\n-------------------------------------------\nAs long as you pay your loan on time and as scheduled with the minimum monthly payment, a precomputed interest loan isn't that different from a traditional simple interest loan. But if you pay off the loan early, the Rule of 78 means you'll end up paying more on a precomputed interest loan.\nFor example, let's say you borrow $5,000 with a 12-month repayment period, no origination fee and a 20% interest rate. The total interest due over that time is $558, which is added to the principal balance of the loan to make $5,558. Your monthly payment would be about $463.\nIf the loan were a simple interest loan and you paid it off in two months, you'd save roughly $484 in interest. But if it were a precomputed interest loan, you'd only save $393.\nHere's how that's calculated: Because you paid off the loan in two months, the lender uses the Rule of 78, adding up the digits for the first two months—12 and 11, which equals 23—then dividing that number by 78 to calculate how much interest it's earned. The answer is 29.5% of the precomputed interest of $558, which means you'll receive a refund of about $393.\nOver time, that refund drops significantly because the amount of interest the lender has earned is frontloaded. END