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What is the difference between the add-on rate and contractual rate?

Add-on rates determine the interest payable at the beginning of a loan, then it is added per month to the principal with each payment. The interest payable amount per month is the same throughout the loan period.

 

Example:

A loan amount of PHP 100,000 with tenure of 1 year and an add-on rate of 1.12% requires a repayment of PHP 8,333.33 plus interest payable monthly of PHP 1,122.63 (1.12% of 100k), totaling PHP 9,455.96 per month. The principal and interest payable remain constant throughout the loan period.

 

On the other hand, annual contractual rates compute the interest payable based on the remaining balance per repayment. The monthly repayment amount is determined using the annuity payment formula.

 

Example:

A loan amount of PHP 100,000 with tenure of 1 year and an annual contractual rate of 24% requires a total repayment of PHP 9,455.96 per month, interest included. The next month's payment is also PHP 9,455.96, but the amount of principal and interest is different because the outstanding loan amount decreased.

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