Add-on interest is the interest paid by the borrower on the principal for the life of the loan. The lender determines the amount of this interest at the beginning of the loan and that is the amount due in total at the end of the lending period.
This is a more complex method of calculating the interest to be paid on a loan, compared to simple interest, 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 repay the loan.
The resulting 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, unless the borrower is considered by the lender to be sub-prime.
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