Car loans · Elgin Auto Sales & Service Center · Elgin, IL
Simple Interest vs. Precomputed Interest Car Loans
Two auto loans with the same rate can treat extra payments very differently, depending on how they calculate interest. Here is how the Consumer Financial Protection Bureau explains simple interest and precomputed interest, and what to check in your contract.
Simpleinterest on the current balance
Precomputedtotal interest set at the start
Far more commonsimple interest loans
Paying earlyfavors simple interest
The short answer
A simple interest auto loan calculates interest on your outstanding balance, daily or monthly, so paying extra makes the principal smaller as you pay the loan down. A precomputed interest loan calculates the total interest up front, adds it to the principal and splits it evenly into payments, so extra payments do not reduce the interest owed. The CFPB says simple interest is far more common, and that if you plan to pay a loan off early, you want a simple interest rate.
How a simple interest car loan works
The CFPB says the simple interest formula, also called an amortizing rate, calculates the interest owed on a daily or monthly basis. The interest you pay each month is based on your actual outstanding balance on the day your payment is due.
If you tend to pay more than your monthly payment, the amount you owe, your principal, gets smaller as you pay down the loan. The CFPB describes simple interest as far more common than precomputed interest.
From What's the difference between a simple interest rate and precomputed interest on an auto loan? (Ask CFPB), read November 9, 2026.
How a precomputed interest car loan works
With precomputed interest, the total interest due under the loan is calculated immediately, added to your principal at the beginning of the loan, and then split into monthly payments. The CFPB says this formula allocates more of your payment to interest during the first part of the loan, and that making extra payments does not reduce the principal amount or interest owed.
The CFPB calls precomputed interest an uncommon way of calculating auto loan interest, and says it benefits the lender if you pay more than the minimum each month or pay off the loan early. If you pay off a precomputed loan early, you ultimately pay more in interest, though you may get a refund of some unearned interest.
From What's the difference between a simple interest rate and precomputed interest on an auto loan? (Ask CFPB), read November 9, 2026.
Simple vs. precomputed interest, side by side
The CFPB's explanation, summarized:
| Simple interest | Precomputed interest | |
|---|---|---|
| How common | Far more common | Uncommon |
| When interest is figured | Daily or monthly, on the outstanding balance | All at once, at the start of the loan |
| Paying more than the minimum | The principal gets smaller as you pay down the loan | Does not reduce the principal or interest owed |
| Paying off early | The CFPB says you want simple interest if you plan to pay early | You ultimately pay more interest; you may get a refund of some unearned interest |
From What's the difference between a simple interest rate and precomputed interest on an auto loan? (Ask CFPB), Consumer Financial Protection Bureau, read November 9, 2026.
How your payments are applied
On an auto loan, the CFPB says your monthly payment generally goes first to any fees due, such as late fees, then to interest due, including interest accrued from past payments, and the rest goes to the principal balance. The more you pay down principal, the quicker you pay down the loan and the less interest you pay.
You may be able to ask your lender or servicer to apply more of your payment to principal; check your loan documents first, and review your monthly statement to confirm how a payment was applied.
From Is it better to pay off the interest or principal on my auto loan? (Ask CFPB), read November 9, 2026.
What to check before you sign
The Truth-in-Lending disclosure your lender or dealer must give you before you sign lists the APR, the finance charge, the amount financed and the total of payments, along with whether you can prepay the loan without a penalty. The CFPB says to request it before you sign so you can review it in detail and make sure it matches the rate you were given.
If you think you may pay the loan off early, ask the lender whether it uses simple or precomputed interest and whether the contract has a prepayment penalty. The CFPB says you can negotiate to have a prepayment penalty removed or ask for a different loan. See APR vs. interest rate and how to finance a used car.
From What is a Truth-in-Lending disclosure for an auto loan? (Ask CFPB), What's the difference between a simple interest rate and precomputed interest on an auto loan? (Ask CFPB) and Can I prepay my loan at any time without penalty? (Ask CFPB), read November 9, 2026.
Financing a used car at Elgin Auto Sales & Service Center
Shopping for your next vehicle? Browse our used inventory, see our financing options, start a finance application, or get a value with our trade-in form.
Our sales department at 1200 E. Chicago St. in Elgin is open Monday to Friday 9 a.m. to 7 p.m. and Saturday 9 a.m. to 6 p.m., and is closed Sunday. Get directions.
Simple vs. precomputed interest FAQ
What is a simple interest car loan?
The CFPB says a simple interest loan calculates interest on a daily or monthly basis, based on your actual outstanding balance on the day your payment is due.
What is precomputed interest on a car loan?
The total interest is calculated at the start of the loan, added to the principal and split into monthly payments. The CFPB calls it uncommon.
Which is better if I want to pay off my car early?
The CFPB says that if you plan to pay your loan off early, you want to make sure the lender is using a simple interest rate.
Do extra payments help on a precomputed loan?
The CFPB says making extra payments on a precomputed interest loan does not reduce the principal amount or interest owed, though paying off early may get you a refund of some unearned interest.
How do I know which type my loan is?
Check your loan contract and ask your lender or servicer. Your Truth-in-Lending disclosure also shows the finance charge and whether you can prepay without a penalty.
What are your sales hours?
Monday to Friday 9 a.m. to 7 p.m. and Saturday 9 a.m. to 6 p.m. We are closed Sunday.
Shopping for your next car?
Visit us at 1200 E. Chicago St. in Elgin.
Sources
Interest-type, payment-application, Truth-in-Lending and prepayment guidance are from the Consumer Financial Protection Bureau's Ask CFPB auto loan answers, read November 9, 2026. This is general information, not financial or legal advice. Our address, sales and service hours are from our own website, checked the same day. Photo is of our dealership.
- What's the difference between a simple interest rate and precomputed interest on an auto loan? (Ask CFPB), Consumer Financial Protection Bureau, read November 9, 2026
- Is it better to pay off the interest or principal on my auto loan? (Ask CFPB), Consumer Financial Protection Bureau, read November 9, 2026
- What is a Truth-in-Lending disclosure for an auto loan? (Ask CFPB), Consumer Financial Protection Bureau, read November 9, 2026
- Can I prepay my loan at any time without penalty? (Ask CFPB), Consumer Financial Protection Bureau, read November 9, 2026
- Home page: address and sales hours, Elgin Auto Sales & Service Center