Add-On Interest

Add-on interest refers to 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. For example, if someone borrowed $1000 from a lender for three years at a 10 percent annual interest rate, the amount of interest due by the end of the loan period is $300. Added to the principal, the full total due by the end of the loan is $1300. That was a simple example. In many cases, the amount of interest calculated is higher than the nominal rate because the borrower pays back a certain amount of principal with each payment he or she makes.