First and foremost, check with your regulatory body on what loan product they allow in their state.  Federal law prohibits pre-computed interest using the Rule of 78’s in any loan with a term of more than 61 months. 17 states ban such loans entirely.  Intro XL offers only a daily simple interest accrual product (without a  grace period) or a pre-computed product with the following options:

1. The rule of 78th rebate
2. The actuarial method, which is based on the original amortization schedule and we’re not sure this is even a real product.
3. A hybrid product that will give the borrower the more favorable calculation of simple interest or actuarial method.

Simple Interest Loans can accrue interest on any time schedule; common periods include daily, monthly and annually. Daily accrual, for example, means interest amounts are added to the account balance and the balance changes every day.

A pre-computed interest loan, is essentially an “Account Balance.” (Remember the Account Balance has all the principal and interest on the loan added together) so when you prepay, you are entitled to a “Refund” or “Rebate” of the interest charges that have not been “earned” by the lender.  This refund is typically dictated by state law.  Of course, you are responsible for explaining this rebate in your loan documentation.

Simple Interest vs. Pre-computed

• For late paying borrowers, a pre-computed loan will benefit them since not additional interest is added to the account.  The lender can typically only charge a late fee.
• The original amortization schedule will always work for pre-computed, but with simple interest, the standard payment is a guideline for paying the loan off at maturity.  Missing payments or paying late, changes the interest accrual, so less principal gets paid down.
• For customers that make larger payment or earlier payments, without paying off the loan, a simple interest product will be more beneficial.

Many people in the finance work have demonized pre-computed loans, but only due to the Rule of 78th methodology.  A borrower that consistently pays a few days late, will pay less with a pre-computed loan.