What is the formula for calculating what the APR is on an add-on interest loan?
Answer Add-on interest When the add-on interest method is used, interest is calculated on the full amount of the original principal. The interest amount is immediately added to the original principal, and payments are determined by dividing principal plus interest by the number of payments to be made. When only one payment is involved, this method produces the same effective interest rate as the simple interest method. When two or more payments are to be made, however, use of the add-on interest method results in an effective rate of interest that is greater than the nominal rate. True, the interest amount is calculated by applying the nominal rate to the total amount borrowed, but the borrower does not have use of the total amount for the entire time period if two or more payments are made. Example Using the add-on interest method, interest of $50 (5 percent of $1,000 for one year) is added to the $1,000 borrowed, giving $1,050 to be repaid; half (or $525) at the end of the first half
