 # Question: What Is Precomputed Interest?

A precomputed loan is a loan where the interest for the term of the loan is calculated when the loan is made.

When you pay off early, all of the precomputed interest may not have been “earned.” The earned interest will be calculated based on how long it took you to pay off your loan.

## What is the rule of 78s example?

The rule of 78 methodology calculates interest for the life of the loan, then allocates a portion of that interest to each month, using what is known as a reverse sum of digits. For example, if you had a 12-month loan, you would add the numbers 1 through 12 (1+2+3+4, etc.) which equals 78.

## What’s the difference between simple interest and add on interest?

Simple interest is based on the principal amount of a loan or deposit, while compound interest is based on the principal amount and the interest that accumulates on it in every period. Since simple interest is calculated only on the principal amount of a loan or deposit, it’s easier to determine than compound interest.

## What is a simple loan interest?

Simple interest applies mostly to short-term loans, such as personal loans. A simple-interest mortgage charges daily interest instead of monthly interest. When the mortgage payment is made, it is first applied to the interest owed. Any money that’s left over is applied to the principal.

## How do you calculate the Rule of 78s on a loan?

For a one year loan, the total number of digits is equal to 78, which explains the term the Rule of 78. For a two year loan, the total sum of the digits would be 300. With the sum of the months calculated, the lender then weights the interest payments in reverse order applying greater weight to the earlier months.

## Is the rule of 78 still used?

There are rules governing when a lender can apply the Rule of 78. Federal law generally stipulates that in some cases — like mortgage refinances and other types of consumer loans with precalculated interest — lenders can’t apply the Rule of 78 to loans with repayment periods of longer than 61 months.

## What is the rule of 76?

The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. For example, the Rule of 72 states that \$1 invested at an annual fixed interest rate of 10% would take 7.2 years ((72/10) = 7.2) to grow to \$2.

## What is meant by add on interest?

Add on interest is a method of charging interest. Interest payable is determined at the beginning of a loan. In add on method interest, interest amount is added on the total amount borrowed and added on to the principal of a debt. Then each payment is deducted from the total amount.

## Where is simple interest used?

It’s relatively easy to calculate since you only need to base it on the principal amount of money borrowed and time period. Simple interest works in your favor when you’re a borrower because it keeps the overall amount that you pay lower than it would be with compound interest.

## What is simple interest?

Simple interest is a quick and easy method of calculating the interest charge on a loan. Simple interest is determined by multiplying the daily interest rate by the principal by the number of days that elapse between payments.

## How do I calculate interest?

Simple Interest Formulas and Calculations:

Use this simple interest calculator to find A, the Final Investment Value, using the simple interest formula: A = P(1 + rt) where P is the Principal amount of money to be invested at an Interest Rate R% per period for t Number of Time Periods.

## Is a simple interest loan bad?

Simple interest is calculated based only on the principal balance outstanding on the loan. The good news is that simple interest results in a lower interest charge over the life of the loan. In fact, the simple interest calculation can save several hundred dollars over the full term of the loan.

## Is a simple interest loan good?

The “simple” in a simple interest loan means that interest is only calculated on the outstanding principal balance. Simple interest does not compound and increase the loan balance. The amount of interest to be paid for each monthly payment cannot increase.