what is add on interest 
add on interest is a method of calculating the interest to be paid on a loan by combining the total principal amount borrowed and the total interest due into a single figure then multiplying that figure by the number of years to repayment 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 this method of calculating the payment on a loan is substantially more expensive for the borrower than the traditional simple interest calculation and is rarely used in consumer loans most loans use simple interest where the interest charged is based on the amount of principal that is owed after each payment is made add on interest loans may occasionally be used in short term installment loans and in loans to subprime borrowers understanding add on interestin simple interest loans where the interest charged is based on the amount of principal that is owed after each payment is made the payments may be identical in size from month to month but that is because the principal paid increases over time while the interest paid decreases if the consumer pays off a simple interest loan early the savings can be substantial the number of interest payments that would have been attached to future monthly payments has been effectively erased but in an add on interest loan the amount owed is calculated upfront as a total of the principal borrowed plus annual interest at the stated rate multiplied by the number of years until the loan is fully repaid that total owed is then divided by the number of months of payments due in order to arrive at a monthly payment figure this means that the interest owed each month remains constant throughout the life of the loan the interest owed is much higher and even if the borrower pays off the loan early the interest charged will be the same example of add on interestsay a borrower obtains a 25 000 loan at an 8 add on interest rate that is to be repaid over four years using a simple interest loan payment calculator the same borrower with the same 8 interest rate on a 25 000 loan over four years would have required monthly payments of 610 32 the total interest due would be 3 586 62 the borrower would pay 4 413 38 more for the add on interest loan compared to the simple interest loan that is if the borrower did not pay off the loan early reducing the total interest even more 