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. See also Amortization; Discount; Rule of the 78's; Simple 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.