Consumer Car Buying Advice Blog

Here at AutoCreditExpress.com, we have always felt that you, as a consumer, need to be kept informed so that you can make an educated buying decision. Whether you are getting a bad credit car loan or a conventional car loan, you need to be aware of the types of car loans in today’s market.

Simple Interest Loan

This is the most common type of car loan. You are charged interest each day on the balance that you owe. In fact, if you make your monthly payment early (on the 2nd of the month versus the 15th), you would be paying less interest over the life of the loan since the daily interest charges (based on the balance) would be less. If you decide to repay the loan early, you have only paid interest until the car is paid off. The payoff price at that time would be the original price of the car plus the total of the daily interest charges to date, minus the payments you have made. In other words, there is no penalty if you pay your car off early.

Rule of 78’s (pre-computed) Loan

This method is not used nearly as much as it used to be and for good reason. With modern disclosure laws relating to finance contracts, most people would not sign on the dotted line. With this type of loan, the interest is computed using amortization tables. This determines the amount of interest charged over the period of the loan and the percentage of interest included in each payment. Typically, you will pay ¾ of the interest charges in the first ½ of the loan term. If you pay the loan off early, the lender will “rebate” part of the interest, but you will still end up paying more interest than the simple interest loan.

How do I know what type of loan I’m getting?

In 1992, Congress outlawed the use of “rule of 78’s” for all closed-end (fixed final payment date) loans over 61 months in length. The following states also outlawed “rule of 78’s” loans for loans 60 months and less: Arizona, Delaware, Idaho, Iowa, Kansas, Maine, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, Nevada, New Hampshire, New York, Oregon, South Dakota and Vermont.

If you live in any one of the other states, be aware that most conventional lenders offer only simple interest loans. However, some sub prime lenders as well as many buy here pay here car lots still use the “rule of 78’s” to compute interest.

Make sure you read your finance contract thoroughly. If it has the words “refund” or “rebate of interest” or if the wording in the “prepayment” portion does not state “no penalty” it is not a simple interest contract – stay away from this type of loan if at all possible.

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