Add-on interest is a type of interest when the lenders define the payment as a percentage of the primary principal. It is charged per annum and multiplies by years of remittance.
The prevalent loan reimbursement systems define the percentage from the sum of the loan balance at the moment of payment. In add-on interest loans, the receiver makes a remittance on the principal sum with constant interest. The total sum of the loan, which the borrower reimburses by prevalent loans, is less costly than the add-on interest.
The add-on interest type is beneficial primarily for the financial foundation that offers the loan for the reason that the receiver undertakes to pay a constant interest once a month. This interest is fixed and adds to each principal remittance regardless of the loan balance.
According to the formula for counting add-on interest, the lender counts a fixed percentage from the principal sum of the loan per annum and multiplies it by the years of reimbursement number. After the lender defines the exact quantity of interest, it is necessary to divide it by the number of total remittances and ad to the principal quantity, which the borrower pays per month.
Let’s admit that the person borrows $20,000 per 5 years at an add-on interest rate of 5%.
- The common interest the person should pay for a loan is $5,000 ($20,000 x 0.05 x 5).
- The quantity of the monthly principal is $333 ($20,000/60).
- The amount of interest the receiver should pay once a month is $83 ($5,000/60) without reference to the amount of principal that is on the loan account at the time of payment.
Thuswise, the receiver must pay $416 monthly for 5 years.
Traditional lenders calculate the interest based on the money balance that is on the loan account when each remittance term begins. The receiver might have to pay a higher percentage if he/she can’t pay the loan on schedule. Although, the lender may lower the interest if he/she pays the loan previously. Add-on interest does not have an option of declining the interest rate when the receiver reimburses the loan anticipatorily.