Add on Interest. This is a method of computing interest in which the interest is calculated on the full amount of the original loan (other wise known as the principal). The add on interest is added to the principal loan amount. Computing the interest is fairly simple:

Add-On Interest = Principal Rate Number of Months in the loan/12.

Example: Lola borrows $1,000 at 8% add-on interest for 48 months

Total add on interest is $320 (1,000xx.08 x (48/12).

Therefore, Lola will repay the $1,320 total in equal monthly installments or $110/month ($1,320/12).

Problem#4:

Suppose you borrow $1,000 for 12 months at 5% add on interest. What would your total interest and monthly installment be?