Reviewed September 2026.
Simple interest auto loans charge interest on the remaining principal each day (or per the contract’s accrual rule). Precomputed loans set the total finance charge up front and bake it into the payment schedule; early payoff credits depend on the rebate method (sometimes actuarial, sometimes older Rule of 78s-style). This page is the interest method. It is not a balloon-payment explainer (What is a balloon payment).
Quick contrast
| Feature | Simple interest | Precomputed |
|---|---|---|
| How interest is earned | On unpaid principal over time | Finance charge figured in advance |
| Early payoff | Usually payoff = principal + accrued interest to date | You may get a rebate of unearned finance charge; method matters |
| Late payment | Extra interest / late fees per note | Late fees; schedule may not “catch up” the same way |
| Common today | Most bank / CU auto loans | Less common; still appears in some retail installment contracts |
Always read your retail installment contract. APR disclosures still apply (APR vs interest rate).
Why the method matters when you pay early
On a simple-interest note, an extra $200 labeled principal reduces future interest immediately if the servicer applies it correctly. On a precomputed note, asking “what is my rebate if I pay off next month?” matters as much as the headline APR. Pair this with Early payoff without a prepayment penalty trap and Prepayment penalties.
Worked example
Two $15,000 loans, 9% APR, 60 months, roughly $311/mo.
After 18 months, Sam (simple interest) requests payoff and owes about principal remaining + a few days’ interest (illustrative: near $11,000 band depending on exact accrual). Alex (precomputed with a less favorable rebate method) might owe more than Sam’s simple-interest payoff for the same payment history because unearned finance charge is rebated slowly early in the term. Exact dollars depend on the contract’s rebate formula; demand the itemized payoff quote, do not eyeball the statement.
Questions to ask before you sign
- Is this loan simple interest or precomputed?
- If precomputed, what rebate method applies on early payoff or refinance?
- Are there separate prepayment penalties on top of the rebate rules?
- How do I label principal-only extras so they reduce balance?
- Is there a balloon at the end? (Separate issue; still ask.)
If you already signed a costly precomputed note, run refinance math at a simple-interest bank or CU (Refinancing a car loan).
Checklist
- Find the interest-method language in the contract.
- Save a payoff quote before any large principal dump or refinance.
- Prefer simple interest when offers are otherwise equal.
- Treat Rule of 78s / front-loaded rebate language as a warning flag.
- Confirm late-fee and deferment rules in writing.
Educational only. Not legal or lending advice. State rules and contract forms vary; the signed note controls.