# What’s the difference between simple interest and add-on interest?

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What’s the difference between simple interest and add-on interest? |

Explanation

Difference between simple interest and add-on interest:-

Under simple interest loans, the interest is paid monthly and the principal amount is payable as per the demand by the bank. However, under add-on interest loan, the interest is calculated on the combined amount, computed by adding principal as well as interest.

Under simple interest loans, the return is much lesser whereas under add-on interest loans the return is higher.

Under simple interest loans, the principal amount remains constant whereas under add on interest loans, the principal amount keeps on varying.

Verified Answer

In a simple interest loan, the borrower is required to pay principle on demand and installments are paid monthly. However, in case of add-on loans, the interest payment is added to the amount borrowed and the periodic installment for the same is determined. In add-on loans, the effective interest paid by the borrower is much higher than the stated rate.