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Add-on interest
Also called precomputed interest, flat interest.
Interest calculated once on the full original principal for the whole term, added to the loan, and repaid in equal instalments, which makes the true cost roughly double the quoted rate.
Drafted with AI assistance and checked by a person. Its factual claims were verified against the sources listed at the end, by Find Me Funders research desk.
What it means
With simple interest, each payment is applied to interest accrued on the balance that is actually outstanding, and the interest shrinks as the balance does. With add-on interest, the interest is computed up front on the entire original principal for the entire stated term, added to it, and the total divided into equal payments.
Because you repay principal throughout the term but pay interest as though you held the whole amount the whole time, the effective annual rate on an add-on loan is substantially higher than the stated rate; for level monthly payments over a year it is close to double.
Add-on structures still appear in equipment paper, some vendor finance and small installment lending, and they are structurally identical to a factor rate: a fixed total cost fixed at signing. Some agreements handle early payoff with a rebate calculated by the Rule of 78s, which front-loads earned interest and gives back less than a simple-interest payoff would.
State law matters here. Several states regulate precomputed interest and rebate methods on certain loan types, and a few restrict or prohibit Rule of 78s rebates on longer terms, but coverage of commercial borrowers varies and is often thinner than for consumers.
Where this one catches people
A quoted add-on rate is not comparable to an APR and is not comparable to a bank rate. Ten percent add-on is not ten percent a year. If a quote gives you a rate and a total payback but no APR and no amortization schedule, assume the rate is add-on and work out the cost from the total.
Worked through
Borrow 50,000 at 10 percent add-on for 12 months. Interest is 50,000 x 10 percent = 5,000, added to give 55,000, repaid at 4,583.33 a month. Average balance outstanding is about half the original, so the effective annual rate is roughly 18 percent, not 10.
Figures in the example are illustrative. They show the arithmetic, not a quote — what any one lender would charge is on that lender's page, where it is published at all.
Where you will meet this term
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Sources and checks
Every figure on this page traces to a document someone read, on a date. Where a check is past its review date it says so rather than passing as current.
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50,000 at 10% add-on over 12 months gives 5,000 of interest, 55,000 total, 4,583.33 a month, and an effective annual rate of about 18%
example50,000 x 0.10 = 5,000; 50,000 + 5,000 = 55,000; 55,000 / 12 = 4,583.33. Solving 50,000 = 4,583.33 x (1-(1+i)^-12)/i gives i = 1.4977% a month; x 12 = 17.97% nominal annual (EAR 19.53%). 'Roughly 18 percent, not 10' is correct, and 17.97 / 10 = 1.80 supports the definition's 'close to double'.
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federal law restricts Rule of 78s rebates on longer consumer credit, as the definition states, while leaving commercial coverage to state law
definition15 U.S.C. s 1615(b): 'For the purpose of calculating any refund of interest required under subsection (a) for any precomputed consumer credit transaction of a term exceeding 61 months which is consummated after September 30, 1993... the creditor shall compute the refund based on a method which is at least as favorable to the consumer as the actuarial method.' The section is limited to consumer credit transactions, so it does not reach commercial borrowers.
Add-on interest — common questions
What does add-on interest mean?
Interest calculated once on the full original principal for the whole term, added to the loan, and repaid in equal instalments, which makes the true cost roughly double the quoted rate.
Where does add-on interest catch people out?
A quoted add-on rate is not comparable to an APR and is not comparable to a bank rate. Ten percent add-on is not ten percent a year. If a quote gives you a rate and a total payback but no APR and no amortization schedule, assume the rate is add-on and work out the cost from the total.
Is add-on interest the same as an interest rate?
Add-on interest is defined above; if you are comparing it against a rate, check whether the two measures share a time dimension before you put them side by side.
Which products does add-on interest apply to?
Working Capital, Term Loan, Equipment Financing.
Is there a worked example of add-on interest?
Yes, on this page, and it is labelled illustrative. It shows the arithmetic, not a quote from any lender.
What else should I read alongside add-on interest?
Amortization, Annual percentage rate, Factor rate, Prepayment penalty, Rule of 78s.
Has this definition been checked?
Yes. Its claims were verified against the sources listed at the end of this page, and the reviewer is named.
Is this legal advice?
No. It is a definition. What a clause does in your contract, in your state, is a question for a lawyer licensed where you are.
Can I suggest a term?
Yes — [email protected]. The glossary grows from what people are actually shown in contracts.