What is Add-On Interest?

Add-On Interest is a very simplified method of calculating the total Finance Charges for a loan.

The Rate is simply multiplied by the Principal, and that result multiplied by the number of years in the loan.


$10,000 Principal

15% Add-On Rate

48 Months (4 Years) (Or use Number of Pmts / 12 to arrive at years, if the months is not a multiple of 12)

The Finance Charges on this loan would be: 10,000 x .15 = 1500 per year. 1500 x 4 = 6000 Total Finance Charges.

The Principal is added to the Finance Charges 10000+ 6000 = 16000 to arrive at the Total Loan Amount or Total of Payments.

16000 / 48 = 333.33 Per payment

To calculate a loan other than Monthly:

  • Use Number of Payments / 52 to arrive at Years for Weekly Payments
  • Use Number of Payments / 26 to arrive at Years for Bi-Weekly Payments
  • Use Number of Payments / 24 to arrive at Years for Semi-Monthly Payments
  • Some states may require different methodologies to arrive at the actual number of Years.
    • One example is to take the Last Payment Date – Loan Date as a number of Days, and dividing that by 365.25 to arrive at the numeric “years.”

If the First Payment Date on the Loan is other than a normal Days to First Payment, some states require the “Years” value to be the actual time between the Loan Date and the Last Payment.

The reason this still exists is that some states have their consumer protection laws written so that the Maximum Finance Charges on a Loan are defined using a Dollar Amount per hundred financed per year. If that rate is expressed as “US$17 Per Hundred Per Year,” that is an Add-On Rate of 17%.

In a State Audit, or if the Dealer is facing a lawsuit over the allowable finance charges, the calculation to be used will be the Add-On Calculation.

  • United States Federal Law (Regulation Z) requires that the Rate that is disclosed on the Finance Contract must be an actual APR.
  • The Actual APR on the example loan above is 25.315 %

This is an Initial Calculation Method ONLY, it is not a Collection Method.

The loan will be collected using either Simple or Precomputed Interest Method. See this Page for more explanations of that: https://louiesusedcars.bettencourtt.com/calculating-loan-interest

Also, more about “Pre-Computed Interest” — also known as the Rule of 78’s is found here: https://louiesusedcars.bettencourtt.com/is-rule-of-78s-theft-a-trick-or-a-trap

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