Add-On Interest
Barron's Banking Dictionary:
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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.
Barron's Real Estate Dictionary:
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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.The add-on interest rate significantly understates the true cost of money because the rate is applied to the entire principal balance, without adjustments for payments that reduce principal. The ANNUAL PERCENTAGE RATE (APR) provides a more accurate cost of money.
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.
The amount of interest for all years is computed on the original amount borrowed.The add-on interest rate significantly understates the true cost of money because the rate is applied to the entire principal balance, without adjustments for payments that reduce principal. The ANNUAL PERCENTAGE RATE (APR) provides a more accurate cost of money.
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.
| Ad Valorem Tax, Ad Valorem | |
| Addendum, Additional First-Year Depreciation |
Investopedia Financial Dictionary:
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Add-On Interest
A method of calculating interest whereby the interest payable is determined at the beginning of a loan and added onto the principal. The sum of the interest and principal is the amount repayable upon maturity.
Investopedia Says:
For example, let's say Bank A borrows $1,000 for two years from Bank B and that annual interest rates are 9%. Furthermore, Bank A will repay the loan in two equal repayments at the end of each year. The interest charge on the loan is $180 ($1,000 x 9% x 2 years). Adding this to the principal gives a total of $1,180. The annual payment will be $590 ($1,180/2).
When multiple repayments are used in add-on interest, the effective lending rate becomes higher than the nominal rate. This is caused the borrower returns a portion of the principal with each payment, but is still being charged interest on the amount of the original loan. In short, if you are borrowing under the add-on interest method, you are paying more.
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Copyrights:
Barron's Banking Dictionary
Dictionary of Banking Terms. Copyright © 2006 by Barron's Educational Series, Inc. All rights reserved.
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Barron's Real Estate Dictionary
Dictionary of Real Estate Terms. Copyright © 2008 by Barron's Educational Series, Inc. All rights reserved.
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Rule of 78s
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