Add-On Interest


Add-On Interest
A method of calculating interest whereby the interest payable is determined at the beginning of a loan and added onto the principal. The sum of the interest and principal is the amount repayable upon maturity.

For example, let's say Bank A borrows $1,000 for two years from Bank B and that annual interest rates are 9%. Furthermore, Bank A will repay the loan in two equal repayments at the end of each year. The interest charge on the loan is $180 ($1,000 x 9% x 2 years). Adding this to the principal gives a total of $1,180. The annual payment will be $590 ($1,180/2).

When multiple repayments are used in add-on interest, the effective lending rate becomes higher than the nominal rate. This is caused the borrower returns a portion of the principal with each payment, but is still being charged interest on the amount of the original loan. In short, if you are borrowing under the add-on interest method, you are paying more.


Investment dictionary. . 2012.

Look at other dictionaries:

  • add-on interest — ➔ interest * * * add on interest UK US noun [U] BANKING ► interest that is added to the principal (= original amount) of a loan. The loan payments are equal to the interest added to the original amount divided by the number of months of the loan …   Financial and business terms

  • add on interest — Method of charging interest usually in the financing of certain major types of consumer goods and generally not in real estate financing. Interest is computed on the total amount borrowed and added to the principal. Each payment is then deducted… …   Black's law dictionary

  • add on interest — Method of charging interest usually in the financing of certain major types of consumer goods and generally not in real estate financing. Interest is computed on the total amount borrowed and added to the principal. Each payment is then deducted… …   Black's law dictionary

  • add-on interest loan — loan in which the sum of its interest is paid at the time of repayment …   English contemporary dictionary

  • interest — the cost of borrowing money. Glossary of Business Terms What is paid to a lender for the use of his money and includes compensation to the lender for three factors: 1) Time value of money (lender s rate) the value of today s dollar is more than… …   Financial and business terms

  • Interest — The price paid for borrowing money. It is expressed as a percentage rate over a period of time and reflects the rate of exchange of present consumption for future consumption. Also, a share or title in property. The New York Times Financial… …   Financial and business terms

  • Interest — For other uses, see Interest (disambiguation). Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money,[1] or money earned… …   Wikipedia

  • interest — The most general term that can be employed to denote a right, claim, title, or legal share in something. In its application to real estate or things real, it is frequently used in connection with the terms estate, right, and title. More… …   Black's law dictionary

  • interest — The most general term that can be employed to denote a right, claim, title, or legal share in something. In its application to real estate or things real, it is frequently used in connection with the terms estate, right, and title. More… …   Black's law dictionary

  • add — /æd/ verb to put figures together to make a total ● If you add the interest to the capital you will get quite a large sum. ● Interest is added monthly …   Dictionary of banking and finance