Add-on interest loans have interest baked into the principal. Bankrate explains.

## What is an add-on interest loan?

An add-on interest loan is a loan where the interest has been calculated at signing and added to the principal to make one single balance. Rather than make periodic payments against discrete interest and principal amounts, borrowers of an add-on interest loan make payments against the principal, which includes the interest amount.

## Deeper definition

Conventional loans accrue interest based on the balance left on the loan at the end of each payment cycle. This is called simple interest. Over time, borrowers may owe more interest if they don’t meet their payment obligations, but they could also owe less if they pay off the principal sooner than the maturity date of the loan.

With an add-on interest loan, it’s not possible to avoid paying less interest because the interest has already been added to the principal from the start. Each payment the borrower of an add-on interest loan makes against the loan goes toward the principal, which the interest she’d normally pay is baked into. Lenders make the add-on interest calculation when the loan is approved, using two formulas:

Interest = Principal x Annual Interest Rate x Term

Payment = (Principal + Interest) / Total Number of Payments

Looking for a mortgage with a low interest rate? Use Bankrate’s comparison tool to find one that’s right for you.

Carlysle takes out a \$100,000 loan to buy an ultra-high-end 4K TV. The loan is an add-on interest loan with an interest rate of 4 percent and a term of four years. The amount of interest the loan accrues is \$16,000, or 100,000 x 0.04 x 4. Carlysle’s monthly payments look like this: 116,000 / 48, or about \$2,417 per month.

• ## Can you collect unemployment benefits if you have a side business?

If you’re unemployed, some part-time work can reduce what benefits you collect.

4 min read Apr 18, 2022
• ## How to clear your criminal record and reap the financial benefits

Having a criminal record can affect your housing, finances and employment.

7 min read Mar 23, 2022
• ## Personal loan rates for March 16, 2022: Rates remain steady

The personal loan rates for March 16, 2022, have stayed the same since last week.

5 min read Mar 17, 2022
• ## How much does it cost to install tile?

Four key things influence the price tag of a new tile floor.

4 min read Mar 08, 2022
• ## What is an acquisition fee?

This fee may be charged upfront or rolled into your loan.

2 min read Feb 26, 2022
• ## What is LIBOR, and how does it affect loans?

Find out how a key foreign interest rate impacts the interest you pay in the U.S.

5 min read Feb 17, 2022
• ## What is a recourse loan?

A recourse loan determines which assets a creditor can seize if you default.

3 min read Feb 16, 2022
• ## What is Chapter 9 bankruptcy?

Figure out whether a Chapter 9 bankruptcy will affect you and how you can prepare.

4 min read Feb 16, 2022
• ## What you need to know about Chapter 13 bankruptcy

Chapter 13 lets you use your income to repay some of your debts.

5 min read Feb 11, 2022