Interest added or add-on interest is a method of calculating the interest to be paid on a loan by combining the total principal amount of the loan and the total interest due to become one number, then multiplying that number by the number of years for payment. The total is then divided by the number of monthly payments to be made. The result is a loan that combines interest and principal into one amount due.
(Total Loan Principal Amount + Total Maturity Interest) x Number of Payment Years / Amount of Monthly Payment
Add-on interests are much more expensive for borrowers than traditional simple interest calculations and are rarely used in consumer loans. Additional interest loans can sometimes be used in short-term installment loans and loans for subprime borrowers .
Most loans are called simple interest loans – that is, interest that is charged based on the principal amount owed after each payment is made. Payments may be identical in size from month to month, but that is because principal payments increase over time while interest paid decreases.
If consumers pay off a simple interest loan early, savings can be huge. The amount of interest payments that will be attached to future monthly payments has been effectively removed.