Remaining Balance Method $200 Over a Four-Year Period
ADD ON METHOD Interest charged on full principal amount for the entire life of the loan. Total interest amount is added to principal and divided into even payments
Add On Interest Example $1000 borrowed for 4 years at 8% interest.
Step 1: Calculate the total interest paid over the lifespan of the loan $1000 (principal amount) X.08 (interest rate) x 4 (years) $320 Interest Charge This $320 is the Interest Charge (or the total amount of interest paid over the lifespan of the loan) Add On Interest Example
Step 2: Add the interest charge to the principal amount $1000 (principal amount) + $320 (Interest Charge) $1320 (Total amount paid) Add On Interest Example
Step 3: Divide total amount paid by the total number of payments $1320 (total amount paid) / 4 (years) $330 Yearly Payment Notice that the total Interest Charge is $120 higher using the Add-On method than with the Simple Interest Method. Add On Interest Example
Calculating APR (using Add-On Method) R = 2C X 100 L (P + A) Formula Key: R = Annual Percentage RateC = Total Interest Cost L = Length of Loan in YearsP = Principal Amount Borrowed A = Payment Amount Each Period
Add On Interest Example R = 2($320) X 100 4 (1000 + 330)
Add On Interest Example R = 12.03% This APR is MUCH higher than the original 8% interest originally charged (4.03% more)
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