Add-On Rate to APR Converter

Enter the loan amount, the add-on rate you were quoted and the term. The calculator finds the APR that gives the same monthly payment, so you can compare the quote with a loan priced the normal way.

How to use the add-on rate calculator

1. Loan amount: the amount financed, which is the price minus your down payment and trade-in, plus any fees or add-ons rolled into the loan.
2. Add-on rate: the yearly rate the seller or lender quoted, the one used to work out the interest on the full amount.
3. Term: the number of years, up to 10.

The result shows the equivalent APR, the monthly payment, the total interest charged by the add-on method, what the interest would be at the same rate on a normal amortizing loan, and the extra cost of the add-on method.

How add-on interest works

With add-on interest, the lender works out the interest once, on the full amount, for the whole term:

Interest = loan amount × add-on rate × years

That interest is added to the loan amount, and the total is divided into equal monthly payments.

Take the defaults: $50,000 at an 8% add-on rate for 3 years.

• Interest: $50,000 × 8% × 3 = $12,000
• Total to repay: $62,000
• Monthly payment: $62,000 ÷ 36 = about $1,722

The catch is that you start paying the loan back in the first month, but the interest was worked out as if you owed the full $50,000 for all three years. On average you owe only about half the amount over the term, so the true cost of borrowing is close to double the quoted rate.

How the APR is found

The APR is the rate on a normal loan, where interest is charged only on the balance you still owe, that produces the same monthly payment. The calculator searches for that rate. In the example, a $50,000 loan repaid at $1,722 a month for 36 months has an APR of about 14.55%.

So the “8%” loan costs as much as a 14.55% loan priced the usual way. At a real 8% APR, the same loan would cost about $6,405 in interest instead of $12,000, which is $5,595 less.

Typical conversions

The APR is always much higher than the add-on rate, and the gap grows with the rate.

Add-on rate	Term	Equivalent APR	Interest on $50,000
5%	3 years	9.31%	$7,500
6%	4 years	10.97%	$12,000
8%	2 years	14.68%	$8,000
8%	3 years	14.55%	$12,000
8%	4 years	14.35%	$16,000
10%	3 years	17.92%	$15,000

A quick rule of thumb: the APR is a little under double the add-on rate for loans of two to five years. Use the calculator for the exact figure.

Where you still see add-on rates

Most US banks and credit unions quote simple interest loans, where the APR and the note rate are close. Add-on rates still turn up in:

• buy-here-pay-here car lots and some independent dealers,
• furniture, appliance and electronics store financing,
• some motorcycle, boat and RV financing,
• equipment and small-business lending, where they may be called a “factor rate” or “flat rate”,
• some installment loans from consumer finance companies.

The salesperson may quote the add-on rate, or just the monthly payment, because both look better than the APR.

Example: a used car at the dealer

You find a $23,000 car, put $3,000 down and the finance office offers to finance the remaining $20,000 “at 6% for five years” with a payment of about $433 a month. That payment is what you get when $6,000 of add-on interest ($20,000 × 6% × 5) is added to the loan and the $26,000 total is split over 60 months.

Enter $20,000, 6% and 5 years. The APR comes out at about 10.85%. A credit union loan at a genuine 6% APR for the same five years would cost about $3,199 in interest, so the dealer’s offer costs about $2,801 more. If the credit union quotes 8% instead, its loan is still cheaper than the dealer’s “6%”. At 8% APR the credit union loan costs about $4,332 in interest, still $1,668 less than the $6,000 the dealer would charge. The monthly payment alone would never have shown you that, which is why the conversion matters before you sign.

Your rights under the Truth in Lending Act

For consumer loans, the federal Truth in Lending Act requires the lender to disclose the APR and the finance charge in writing before you sign. Look for the box headed “Annual Percentage Rate” on the disclosure. If the APR there is far above the rate you were told, the lender has quoted an add-on rate or added fees. Either way, the APR is the figure to compare with other offers.

Business loans are not covered by the same federal rules, although several states now require APR disclosure on small-business financing. If a lender quotes only a factor rate or a total payback amount, this calculator gives you the APR to compare.

How to compare two offers

1. Convert any add-on or flat rate to an APR with this calculator.
2. Make sure both offers are for the same amount and term.
3. Add fees that are not in the APR, such as documentation fees or optional add-ons you are pressured to buy, to the amount financed.
4. Compare the monthly payment and total cost in the loan payment calculator using each APR.

If one offer is a simple interest loan at 9% APR and the other an add-on loan at 6% for four years, the add-on loan is the more expensive one: its APR is about 10.97%.

Paying an add-on loan off early

With a simple interest loan, paying early saves the interest for the months you no longer owe money. Add-on loans are different. The interest was charged up front, so on early payoff the lender must give you a rebate of the unearned interest, and the method used for that rebate matters. Some states still allow the Rule of 78s on shorter loans, which gives a smaller rebate early in the loan than the actuarial method. Federal law bars the Rule of 78s on consumer loans longer than 61 months. Ask the lender how the payoff would be calculated before you sign. The extra payment calculator shows the saving on a normal amortizing loan for comparison.

Questions to ask before you sign

• What is the APR, and what is the total finance charge?
• Is the interest simple interest or precomputed?
• How is interest rebated if I pay off early?
• Are there fees for paying early?
• Which optional products, such as service contracts or credit insurance, are included in the amount financed, and can I remove them?

If the answers are vague, take the paperwork home and run the numbers here first. A credit union auto loan is often a useful benchmark, and many credit unions will preapprove you before you visit the dealer.

Keep a copy of the signed disclosure with the loan papers. If you refinance later, it is the quickest way to check what you are paying now.

The conversion runs in your browser, and the figures you enter are not sent anywhere.

Learn more

Add-on interest vs APR shows both methods on the same loan. How to convert an add-on rate to APR gives the rule of thumb and the questions to ask before signing.

Frequently asked questions

What is an add-on interest rate?

It is a rate applied to the original loan amount for the whole term, with the interest added to the loan before it is split into payments. Because you repay principal every month but keep paying interest on the original amount, the true cost is much higher than the quoted rate suggests. The APR shows the real cost.

Is a 6% add-on rate a good deal?

It depends on the term, but a 6% add-on rate over four years is about a 10.97% APR. That is higher than what many credit unions charge for car loans to borrowers with good credit. Convert it here and compare it with a simple interest quote before deciding.

Why does the APR barely change with the term?

Because add-on interest grows in line with the term, and so does the time you have to repay. The two effects mostly cancel out. An 8% add-on rate works out to about 14.68% APR over two years and about 14.35% over four. The total interest, however, doubles from $8,000 to $16,000 on $50,000.

Is add-on interest legal?

Yes, in most states, as long as the lender discloses the APR and finance charge as the Truth in Lending Act requires, and stays within the state’s rate limits. The add-on rate is a way of pricing a loan, not a hidden fee. The disclosure lets you compare it with other offers.

Is a flat rate the same as an add-on rate?

Yes. Flat rate is the term used in many countries and in some business lending. Both charge interest on the original amount for the full term. A factor rate in business lending is similar but usually quoted as a multiplier, such as 1.2, meaning you repay 1.2 times the amount borrowed.

How do I convert a factor rate to an add-on rate?

Subtract 1 and divide by the term in years. A factor rate of 1.24 on a two-year loan is 0.24 ÷ 2 = 12% a year add-on. Enter that here with the loan amount and term to get the APR. Many business loans with factor rates are paid daily or weekly, which makes the real APR higher still.