Monthly Add-On Rate Calculator
Calculate your monthly amortization using the fixed add-on rate method. This tool helps you determine the total interest payable and the true cost of financing often used in vehicle loans, appliance financing, and personal loans.
Understanding Monthly Add-On Rates
The Monthly Add-On Rate is a simple interest calculation method widely used by banks, lending institutions, and car dealerships. Unlike a "diminishing balance" loan where interest is calculated based on what you currently owe, an add-on rate calculates interest based on the original principal amount for the entire duration of the loan term.
This distinction is critical because an add-on rate of 1.5% per month might seem low, but because the principal basis never decreases in the calculation, the effective annual interest rate is significantly higher than simply multiplying the monthly rate by 12.
The Add-On Rate Formula
To calculate your payments manually, you can use the logic provided below. This is exactly how the calculator above processes your inputs:
Total Interest = Monthly Interest × Repayment Period (Months)
Total Amount to Pay = Principal + Total Interest
Monthly Amortization = Total Amount to Pay / Repayment Period
Why the "Add-On" Rate is Misleading
Consumers often confuse the monthly add-on rate with the effective interest rate. Here is why you need to be careful:
- Fixed Interest Cost: Even as you pay down the principal every month, you are still paying interest on the full original amount.
- Higher Effective Rate: A 1% monthly add-on rate results in an Annual Percentage Rate (APR) of roughly 21-22% for a one-year loan, not 12% as many assume.
- Pre-termination Penalties: Since the interest is pre-computed, paying off the loan early often does not save you money on interest unless the lender specifically offers a rebate or interest re-computation.
Common Use Cases
You will typically encounter this calculation method in the following scenarios:
- Auto Loans: Car financing quotes are almost exclusively presented in add-on rates.
- Appliance Loans: In-store financing for electronics and furniture.
- Personal Loans: Quick-cash loans from non-bank financial institutions.
- Equipment Leasing: Commercial financing for business machinery.
Example Calculation
Let's assume you are financing a gadget worth $50,000.
- Principal: $50,000
- Add-On Rate: 2.0% per month
- Term: 12 months
First, calculate the monthly interest: $50,000 × 0.02 = $1,000.
Next, calculate total interest for the year: $1,000 × 12 = $12,000.
Total repayment amount: $50,000 + $12,000 = $62,000.
Finally, your monthly amortization: $62,000 ÷ 12 = $5,166.67.
Frequently Asked Questions
How do I convert monthly add-on rate to annual rate?
To get a rough estimate of the effective annual cost (APR) from a monthly add-on rate, you can multiply the monthly add-on rate by 12 and then multiply that result by roughly 1.8 to 2.0. For a precise calculation, you must determine the Internal Rate of Return (IRR) of the cash flows, which our calculator estimates for you in the results section.
Is a lower add-on rate always better?
Generally, yes, a lower rate means less interest. However, you must also look at processing fees, insurance requirements, and the term length. A lower rate over a much longer term will result in higher total interest paid.