The Add on Method is an alternative method of paying interest after it is added onto the principal at maturity.
In this method, the interest on the loan is calculated annually and multiplied by the number of years left for repayment.
Points to remember:
In the Add on Method of interest calculation, the interest is calculated as a percentage of the original principal.
The amount of interest that is added to each payment remains the same throughout the loan.
As compared to traditional loans, add-on interest loans prove to be more costly to borrowers, but are more profitable for financial institutions as the borrower has to pay a greater amount of interest.
Example: If ABC borrowed a loan of USD 10,000 with an annual add on interest rate of 10%, no matter how much the principal amount is at the beginning of each payment period, ABC will be still paying $1,000 every year.