Definition of Add On interest

The Add On interest refers to the method of calculating the payable interest when requesting for a loan. That amount of interest is then added onto principal.

Brief Explanation of Add On interest

Upon maturity both the total sum of interest as well as the principal comprises the repayable amount.

For instance if a loan is acquired on a ten percent interest rate and is liable for repayment in two years will two equal payments per annum then this would mean the total amount payable towards the end if each year will include the principal cost plus the amount equivalent with the 10% interest rate.

To sum it up if a person is borrowing under the add on interest method, he would eventually be paying more. This is because of the multiple repayments that are used in add on interest. In which case the effective lending rate becomes much higher than the amount that is normally charged. This means that with each return payment the borrower does return a portion of the principal but interest rate is still applied on the amount of the original loan which will of course be higher.