How the rate changes the cost

The denominator never declines

The add-on calculation uses original principal for every year. A normal amortizing rate applies periodic interest to the remaining balance, which falls after each payment.

Convert with cash flows

Use the amount actually received as time zero and the required payment schedule as outflows. Solve for the periodic rate that equates them, then annualize consistently.

$10,000, three years, 8% add-on

Rate input
Interest added upfront: $2,400
Rate input
Total scheduled payments: $12,400
Rate input
Monthly payment: about $344.44
Rate input
Cash-flow APR is roughly 14.5%
Rate input
An 8% amortizing loan would cost materially less

Illustrative calculation. Rounded values can differ from a lender or card issuer schedule.

This decision belongs in The Real Cost of Borrowing. Use Simple vs. Compound Interest: Follow the Balance, Not the Label to check the next assumption, then test the numbers in the True APR Calculator.

Interpret the result in context

Refund rules matter

Some contracts rebate unearned finance charge after early payoff using a statutory formula. Ask for a payoff quote; do not assume remaining scheduled interest disappears dollar for dollar.

Common settings

Add-on structures may appear in certain vehicle, installment or short-term credit products. The contract’s finance-charge method matters more than the marketing label.

Inputs that change the answer

Add-on interest is calculated from the original principal even as payments reduce what you owe. Rebuild the cash flows to find a comparable rate instead of comparing the quoted percentage directly with an amortizing loan.

Figures needed to expose the effective cost

  • Cash received after fees and deductions.
  • Total add-on interest included in the contract balance.
  • Number, amount and due dates of every payment.
  • Calculate total add-on interest from original principal.
  • Add fees and determine actual proceeds.
  • Build the full payment schedule.
  • Solve the implied cash-flow rate.
  • Request early payoff figures at multiple dates.

Rebuild the calculation with your terms

True APR Calculator

Turn the money you actually receive and repay into one comparable annual rate.

Where rate comparisons go wrong

  • Reading the add-on percentage as an amortizing APR.
  • Subtracting payments from principal without accounting for finance charge.
  • Assuming early payoff refunds all future interest.
  • Ignoring a fee withheld from proceeds.

Questions this decision usually raises

Is add-on interest illegal?

Rules differ by product and jurisdiction. The calculation method itself should be disclosed; ask the relevant regulator if terms are unclear.

Why is the effective rate so much higher?

Because interest is priced as if the full principal remained outstanding even while payments reduce what you owe.

Can the True APR Calculator model it?

Yes. Enter actual proceeds and the required payment cash flow rather than the quoted add-on rate.

Check the rules and definitions

This page explains a calculation, not a personal recommendation. Contract rules and consumer protections vary by product and jurisdiction. Check the current agreement and official guidance before acting.