Add-On Interest Calculator
Calculate add-on interest loans, see the true effective APR, and compare with reducing balance method to understand the real cost.
What is Add-On Interest?
Add-on interest (also called flat rate or precomputed interest) calculates interest on the full principal for the entire loan term upfront. This interest is "added on" to the principal, and the total is divided into equal monthly payments. Unlike reducing balance loans, you pay interest on the original amount even as you pay it down.
Total Interest = Principal × Annual Rate × Term (years)
Monthly Payment = (Principal + Total Interest) ÷ Number of Months
Understanding Add-On Interest
Add-on interest is commonly used in auto loans, personal loans, and some financing arrangements. While the calculations are simpler, it typically costs borrowers significantly more than reducing balance loans.
How Add-On Interest Works
- Interest is calculated on the full principal for the entire term
- This total interest is "added on" to the principal amount
- The sum is divided equally across all payment periods
- Each payment contains both principal and interest in fixed proportions
Why Effective APR is Higher
With add-on interest, you pay interest on money you've already repaid. After making half your payments, you still owe interest on the original full amount, even though you've paid back half the principal. This makes the effective annual rate roughly 1.8 to 2 times the stated rate.
Add-On vs Reducing Balance
| Feature | Add-On Interest | Reducing Balance |
|---|---|---|
| Interest calculated on | Full principal (always) | Remaining balance |
| Total interest paid | Higher | Lower |
| Effective APR | ~2x stated rate | Same as stated rate |
| Early payoff benefit | Limited (Rule of 78s may apply) | Saves interest immediately |
Common Uses of Add-On Interest
- Auto dealership financing
- Furniture and appliance financing
- Some personal installment loans
- Buy-here-pay-here auto lots
Tips for Borrowers
- Always ask for the effective APR, not just the stated rate
- Compare offers using APR, not flat rates
- Consider bank or credit union loans (usually reducing balance)
- Be wary of early payoff penalties with add-on interest loans