The Rule of 78 Pre-computed Interest Loans

The pre-computed loans are not widely used anymore but unfortunately some still use to. This is the type of loan that you as a borrower never want to be a party to. The set up and format is really designed to make the consumer pay more interest up front than they bargained for. Even when a consumer pays their loan off early they don't get the break they expected. In fact paying off a pre-computed rule of 78 loans actually penalizes a borrower.

When you make your payments a portion goes to interest and a portion goes to principal unfortunately you never see the breakdown because everything is lumped together. Your balance will show as the total amount of your payments which is the interest that's due over the term of the loan plus the principal. Any payments will show that the entire balance is being reduced but there is an internal transaction taking place that allows more of the payment to go to interest than principal. By the time the borrower is half way through the loan he has paid the vast majority of the finance charges.

These loans are prohibited in a number of states because they are not designed to help the consumer. The interest bearing loans are more prevalent today and the consumer is not penalized for paying these types of loans off early. When a consumer makes a payment on an interest bearing loan you can actually see the breakdown when payments are applied. A portion of the payment goes to interest and a portion goes to principal. To an extent the consumer can control the amount of interest they pay with the interest bearing loan. If they pay an interest bearing loan off early they can actually save money in finance charges. The lower the balance the less finance charges that accrue from month to month.

With a rule of 78 pre-computed loan you are actually penalized when you attempt to payoff a loan early. These types of loans are used primarily for auto loans. If you ever have a choice in the matter it would be to your advantage to avoid a rule of 78 pre-computed loan s if at all possible. You are going to find that those with less than perfect credit are more likely to receive this type of loan. Some of the dealerships that offer their own financing will offer these types of loans.

You just have to imagine that a loan that penalizes the consumer for paying it off early is a good loan. A lot of people like to pay off their loans early to get them out of the way but doing that with this loan does not work to the consumers' advantage.

Source: http://www.bankrate.com/brm/news/auto/20010827a.asp