Add-on interest refers to an interest amount that is calculated at the start of the loan term and then added to the loan principal, resulting in equal installment payments over the entire loan period. This method typically results in a higher cost of borrowing compared to other interest calculation methods.
The Rule of 78 is a method for calculating the amount of interest to be refunded if an installment loan with add-on interest is paid off early. It takes its name from the sum of the digits from 1 to 12, totaling 78.
