Benefits of Precomputed Loans
A precomputed loan is a type of traditional installment loan product which provides borrowers with a total amount in addition to a finance charge that must be repaid in a simple schedule of payments.
Precomputed loans have significant benefits to borrowers because they are easily understood and reasonable. This means that the exact amount of principal and finance charges are always made clear to those who owe money. Also, by putting them on a schedule of affordable installment payments, they have a clear pathway to avoid the cycle of debt.
In addition to their simplicity, precomputed loans also have the benefit of reimbursement of any “unearned portion” of the finance charge, if paid off early. With this extra incentive for early repayment, it ensures a fair and workable solution on both sides.
Changes to Precomputed Loans Bad for Lenders and Borrowers Alike
Any effort to subvert precomputed loans or do away with them altogether could result in significant unintended consequences, including additional costs, increased complexity of the process, and a loss of transparency and simplicity for both borrowers and lenders.
Moreover, compliance with legislative and regulatory changes would require traditional precomputed loans to conform to models already established for interest-bearing loans. For instance, if a law is enacted that would require lenders to calculate refunds based on partial rather than full repayments in their precomputed loans, it would essentially turn a precomputed loan into an interest-bearing loan, which is something it was never intended to be.
Costly for Lenders
These new costs often cannot be passed onto the borrower because the costs of installment loans are generally subject to price controls. Thus, the only alternative for lenders who see spiraling costs is to stop making certain types of loans, which denies borrowers access to the funds they need as well as exacerbates the existing credit crunch.
Additionally, these loans are generally a short duration, so the “savings” to borrowers that could result from a sporadic additional payment or from an early installment payment is typically measured in mere pennies. On the other hand, the cost to lenders for setting up systems to handle this would be measured in thousands of dollars.
Confusing and Non-advantageous for Borrowers
The process by which a precomputed loan is forced to become an interest-bearing loan is nonsensical when one considers that both types of loan will result in the borrower paying exactly the same amount with no advantage to those who make regular or additional payments.
To force a change will also result in consumer loans becoming more complicated for the borrower. No longer would they fully understand the total cost and the schedule of the payment, but they would have to abide by newer, unnecessary, and sometimes confusing terms.
This flies in the face of a national trend toward the eradication of “exotic” and difficult-to-understand loan products, thus, making any regulatory changes unfeasible and a step in the wrong direction.
Information gathered from the American Financial Services Association.
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