How to use the add-on interest loan calculator
- Choose the Quote type. A flat or add-on rate is a yearly percent charged on the original amount. A factor rate is a multiplier, such as 1.2, applied to the amount.
- Enter the amount borrowed, the number of monthly payments and the quoted rate or factor. If the lender keeps an upfront fee, open the advanced option and enter it.
- Read the monthly payment, the total cost and the nominal APR, then compare the effective annual rate, which counts monthly compounding.
- Use the steps and the check line to see how the rate was found, then print or save the result.
Formula
Add-on: interest = amount x flat rate x years
Factor: total repaid = amount x factor
Payment = total repaid / number of payments
Cash received x (the annuity factor at i) = payment, solved for i
Nominal APR = 12 x i, effective annual rate = (1 + i)^12 - 1
The monthly rate i is the one that makes the payments, discounted at i, worth exactly the cash you received. It is found by bisection, and the page discounts the payments again at the answer as a check.
An 8% flat quote and a 1.2 factor quote
A $10,000 loan quoted at 8% flat for 24 months charges $10,000 x 8% x 2 = $1,600 of interest. The total repaid is $11,600 and the payment is $483.33. Because the balance falls as you pay, the true monthly rate is 1.2231%, a nominal APR of 14.68% and an effective annual rate of 15.71%. Discounting the 24 payments at 1.2231% a month gives back $10,000.00.
A $10,000 advance with a factor of 1.2 repaid in 12 monthly payments costs $2,000 and the payment is $1,000. That works out to 2.9229% a month, a nominal APR of 35.07% and an effective rate of 41.30%. If the lender also keeps a $300 fee, you receive $9,700 and the nominal APR rises to 41.23%.
Why a flat rate is not the real rate
A flat rate charges interest on the full original amount for the whole term, even though you owe less each month. A regular loan charges interest only on what is still owed. So a flat quote of 8% is far more expensive than a loan at 8%, and the gap grows with longer terms.
The same idea sits behind factor rates, which are often quoted for short business advances. A factor of 1.2 sounds small, but over 12 months it means paying back 20% extra on money you are returning in pieces. Compare offers by their annual rate, using the APR Calculator or the Loan Calculator for a standard loan.
Nominal and effective rates
The nominal APR here is the monthly rate multiplied by 12, which is the usual way a yearly rate is stated for monthly payments. The effective annual rate compounds that monthly rate for a year and is always a little higher. Different places require different ways of stating a rate, so use the one named in your offer when you compare.
The Rule of 78 Interest Rebate Calculator shows what happens to the interest of this kind of loan if you pay it off early, and the Time Value of Money Solver solves the same cash flows in other directions.
Assumptions and limits
- Payments are equal, monthly and start one month after the money is received.
- An upfront fee is taken out of the cash you receive but is still repaid as part of the amount borrowed.
- No late fees, penalties, taxes or changes in the terms are included.
- The result is an illustration of the numbers you enter, not a disclosure or advice. Everything is calculated in your browser.
Frequently asked questions
What is an add-on interest loan?
It is a loan where interest is figured once on the original amount for the whole term and added to the balance, then split into equal payments. You owe interest on money you have already repaid, so the true yearly rate is higher than the quoted rate.
What is a factor rate?
A factor rate is a multiplier on the amount advanced. A factor of 1.3 on $5,000 means you repay $6,500, however long that takes. It does not say how much you pay per year, so it should be converted to an annual rate before you compare it with other offers.
Why is the effective annual rate higher than the nominal APR?
The nominal APR multiplies the monthly rate by 12 and ignores interest on interest. The effective rate compounds the monthly rate over the year, which adds the extra, so it is always at least as large.
Does the fee change the result?
Yes. A fee kept by the lender means you get less cash while still repaying the full amount. The monthly rate must then be higher to make the payments worth the smaller amount you received.