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Financial Essentials

What is the difference between 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 Php100,000 with tenure of 1 year and an add-on rate of 1.12% requires a repayment of Php8,333.33 plus interest payable of Php1,122.63 (1.12% of 100k), totaling Php9,455.96 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 Php100,000 with tenure of 1 year and an annual contractual rate of 24% requires a total repayment of Php9,455.96 per month, interest included. The next month's payment is also Php9,455.96, but the amount of principal and interest is different because the outstanding loan amount decreased.

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