By MyAutoResource Editorial Team · Reviewed by Steven Sun · 7 min read · Updated September 14, 2026
- Precomputed interest is calculated once at signing and locked into the payment schedule. Simple interest recalculates against your actual balance every month.
- On a simple interest loan, paying $200 extra a month for 12 months on a $25,000, 60-month loan at an 8.77% Annual Percentage Rate (APR) cuts total interest by roughly $1,071 and pays the loan off six months early.
- On a precomputed loan, those same extra payments do not reduce the finance charge already built into the schedule. They only advance you toward payments you would have made anyway.
- Federal law, Section 1615 of Title 15 of the United States Code (15 U.S.C. § 1615), requires lenders to use the actuarial method, not the older Rule of 78s, to calculate any interest refund on a precomputed loan with a term over 61 months. A 60-month loan sits just outside that federal floor.
On a precomputed auto loan, extra monthly payments do not reduce the fixed finance charge. Only a full, all-at-once payoff triggers an interest rebate, while those same extra payments cut total interest immediately on a simple interest loan.
In this article
- Simple interest and precomputed interest are two different accounting methods
- The same loan, run two ways
- The one thing that does help on a precomputed loan: a full payoff
- How to tell which one you have
- Frequently asked questions
A driver who overpays a precomputed contract by $200 a month for a year is not wrong to expect a smaller payoff balance. She is wrong about how much smaller. On a $25,000, 60-month precomputed note, that $2,400 in extra payments advances her through roughly 4.5 future installments without touching the total finance charge fixed into the contract the day she signed it. The payoff quote she gets back barely moves, and the reason is not a mistake. It is how a precomputed contract is built.
Simple interest and precomputed interest are two different accounting methods
The Consumer Financial Protection Bureau (CFPB) draws the line this way: “Precomputed interest results in the total interest due under the loan being calculated IMMEDIATELY. It is then spread equally among monthly payments.” Simple interest, which the CFPB notes is far more common, works differently: it calculates the interest based on the outstanding balance of the loan on a daily or monthly basis.
That single design choice changes what an extra payment actually does. On a simple interest loan, the CFPB notes that when you pay more than your monthly payment, “the amount you owe” (your principal) “gets smaller as you pay down your loan,” which lowers every future interest calculation. On a precomputed loan, the CFPB is blunt about the tradeoff: “Making extra payments does not reduce the principal amount (or interest) owed.” The finance charge for all 60 payments was set the day the contract was signed, and it does not recalculate just because you sent more money this month.
The same loan, run two ways
Take a $25,000 loan, 60 months, at 8.77% APR, the average used-car rate for prime-tier borrowers in Experian’s most recent published credit-tier breakdown. Run as a standard simple interest amortization, the payment is $516.17 a month and the full-term interest cost is $5,970.36.
| Scenario | Simple interest, $200 extra/mo for 12 months | Precomputed, same extra payments |
|---|---|---|
| What the extra payment does | Cuts the balance the next interest charge is calculated against | Advances you toward future scheduled installments |
| Loan payoff timeline | 54 months instead of 60 | Still runs the full 60-month schedule unless you request a full early payoff |
| Total interest paid over the loan | $4,899.82 | $5,970.36 (unchanged, the amount fixed at signing) |
| Interest saved by paying extra | $1,070.54 | $0, unless you pay the note off in full |
| Best for | Borrowers who plan to pay ahead of schedule | Borrowers who plan to pay exactly the scheduled amount every month |
The interest rate never changed between the two columns. What changed is which balance that rate gets applied to, and whether extra money reduces that balance at all before the loan’s final scheduled payment.
The one thing that does help on a precomputed loan: a full payoff
Extra monthly payments do not shrink a precomputed finance charge. A full, all-at-once payoff does, because the lender then has to refund the interest that never actually accrued, called a rebate of unearned interest.
Here is the part worth checking before you sign anything with a term close to five years: 15 U.S.C. § 1615 requires “the creditor shall compute the refund based on a method which is at least as favorable to the consumer as the actuarial method” for “any precomputed consumer credit transaction of a term exceeding 61 months.” A 60-month loan does not exceed 61 months.
That means the federal rule forcing lenders off the older Rule of 78s method, which front-loads more interest into the earliest payments, technically does not reach a standard five-year auto loan. Whether a shorter-term precomputed loan in your state still gets actuarial-method treatment depends on your state’s own retail installment sales law, not federal law. Ask your lender in writing which method applies to your specific contract before you sign.
How to tell which one you have
Your payment schedule or truth-in-lending disclosure will show a “finance charge” that is either the same fixed dollar figure on the day-one disclosure regardless of how you pay (precomputed), or an estimate that assumes on-time, on-schedule payments and will shrink if you pay ahead (simple interest). If your contract or servicer mentions “add-on interest,” “precomputed interest,” or a rebate schedule, treat it as precomputed. If your monthly statement shows a declining principal balance that drives next month’s interest charge, it is simple interest. When in doubt, ask your lender directly which method your note uses. It affects whether extra payments are worth making at all, or whether that money is better used elsewhere and saved for one lump-sum early payoff instead.
For more on how loan structure affects your total cost, see how choosing a 60-month loan versus stretching to 84 months changes total interest and this breakdown of how interest is actually distributed across a loan’s term.
Frequently asked questions
Is a precomputed auto loan illegal? No. Precomputed interest is a legal, disclosed method of calculating finance charges. Lenders must show the total finance charge on your Truth in Lending disclosure regardless of which method they use, so the disclosed cost is accurate either way.
Can I ask my lender to switch my loan to simple interest? Generally no. The interest method is set in the original contract you signed, not something a servicer can convert afterward. Some lenders will let you refinance into a new, simple interest loan instead, which is a separate transaction with its own rate and terms.
Does making extra payments on a precomputed loan hurt me? It does not increase what you owe, but it does not reduce your finance charge either, according to the CFPB. Extra payments advance your due date and can still be useful for cash flow, just not for cutting total interest, the way they would on a simple interest note.
What is a rebate of unearned interest? It is the portion of a precomputed loan’s finance charge that has not yet been “earned” by the lender at the time you pay the loan off in full. Federal law requires the actuarial method, not Rule of 78s, for that rebate on loans over 61 months.
How do I find out which method my loan uses? Ask your lender directly and request it in writing. Check your contract for the words “precomputed,” “add-on interest,” or a Rule of 78s clause. If none of those appear and your statement shows a declining balance driving the next interest charge, you likely have a simple interest loan.
