add-on interest

Dictionary of Banking Terms for: add-on interest
add-on interest

finance charges computed by adding the interest payable to the full amount of loan principal. The add-on interest is added to the original principal amount, and becomes a part of the face amount of the promissory note.

Computing interest due under the add-on interest method is fairly simple. The loan principal is divided into a number of fixed payments, and each payment is multiplied by the finance charge, to calculate the interest cost to the borrower: Add-On Interest = Principal × Rate × Number of Months in the loan/12.

Dictionary of Business Terms for: add-on interest
add-on interest

interest that is added to the principal of a loan. The amount of interest for all years is computed on the original amount borrowed, so the stated rate is much lower than the annual percentage rate (APR), which is required to be disclosed by federal law.

Dictionary of Real Estate Terms for: add-on interest
add-on interest

interest that is added to the principal of a loan. The amount of interest for all years is computed on the original amount borrowed.

Example: Abel borrows $1,000 at 8% add-on interest for 4 years. Total interest is $320 (8% of $1,000 for 4 years). Abel will repay the $1,320 total in equal monthly installments.

Copyright (c) by Barron's Educational Series. Reprinted by arrangement with the publisher of this site.