An add-on interest loan quotes a rate that sounds modest — but because it’s calculated once on the full original principal rather than a declining balance, the true effective APR often runs close to double the stated rate.
How it works
Multiplying principal by the add-on rate and the number of years gives total add-on interest; dividing the principal plus that interest by the total number of months gives the fixed monthly payment. The calculator then searches for the standard amortizing-loan rate that would produce that identical payment, revealing the true effective APR.
What this does not include
This does not include any fees beyond the stated add-on interest itself — origination fees or other charges would push the true effective APR even higher than what this calculator shows.
How to use this calculator
- Enter the loan principal, add-on interest rate, and loan term in years.
Frequently asked questions
Why does add-on interest overstate the effective rate so much?
Because it calculates interest as if the full original principal were owed for the entire loan term, even though the actual balance declines with each payment — the borrower pays interest on money they’ve already partly repaid.
Where are add-on interest loans still common?
Historically common in subprime auto lending and some older consumer finance products — many jurisdictions have since restricted or banned the practice for certain loan types due to its deceptive-looking low headline rate.
How can a borrower spot an add-on interest loan?
Comparing the quoted rate against the loan’s actual APR disclosure (required under Truth in Lending laws) reveals the gap — a large difference between a quoted “rate” and the disclosed APR is a red flag for add-on-style pricing.
