What is an 'AddOn Interest'
A method of calculating interest whereby the interest payable is determined at the beginning of a loan and added onto the principal. The sum of the interest and principal is the amount repayable upon maturity.
BREAKING DOWN 'AddOn Interest'
For example, let's say Bank A borrows $1,000 for two years from Bank B and that annual interest rates are 9%. Furthermore, Bank A will repay the loan in two equal repayments at the end of each year. The interest charge on the loan is $180 ($1,000 x 9% x 2 years). Adding this to the principal gives a total of $1,180. The annual payment will be $590 ($1,180/2).
When multiple repayments are used in addon interest, the effective lending rate becomes higher than the nominal rate. This is caused the borrower returns a portion of the principal with each payment, but is still being charged interest on the amount of the original loan. In short, if you are borrowing under the addon interest method, you are paying more.

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