How do I calculate the monthly payments using the "Add-On"
method?
Consider a 5-year loan of $10,000 with an nominal annual
interest rate of 10%. The total interest is $5,000 =
$10,000 * 10% * 5. The total payment is $15,000 =
$10,000 + $5,000. The monthly payment is simply $250 =
$15,000 / (5 * 12).
In the US, you should look at the loan agreement to learn the
method of apportioning the monthly payment to interest and
outstanding balance. This is controlled by both federal and
state law. Some states might still permit the Rule of 78 to be
used on loans for a term of less than 62 months and loans of
any length established before Oct 1 1993 (federal limitation).
The loan agreement will explain the Rule of 78 calculation, if
that applies to your loan.
I did not find any Excel function or template that would compute
interest paid and interest due using the Rule of 78. Perhaps
someone else can.
(I could provide the Rule of 78 calculation, if you like. But since
the interest computation is controlled by state law, the method
of computation in the loan agreement is dispositive.)
