Question

What is the difference between the interest expense calculations between simple installment loan and add-on loan (also referred as Flat rate loan in Hong Kong) ?

Answer 1

On a simple installment loan, the interest expense is calculation on the left over outstanding principal balance after the last installment. The interest expense is thus calculated on the reducing balance, i.e. the outstanding principal balance left after last installment has been paid.

On the other hand, in case of add-on-loan; the interest expenses calculation is far more convoluted.

• First, the total principal amount borrowed and the total interest due are combined into a single figure,
• The figure is then multiplied by the number of years to repayment.
• The total so obtained is then divided by the number of monthly payments to be made to get the monthly interest expense