Computing for Monthly Add-On Rates

I always get invitations from my credit card to take out personal loans with the "low monthly add-on rate of 0.59%" or some other ridiculously low amount, and it is so enticing because it's a fraction of a percent! Saan ka pa, right?!

But as I did some research, I soon realized that monthly add-on rates are not really the big discounts they purport to be. 

To begin, add-on interest "refers to the calculation method of determining the total interest to be paid on a loan. Once the interest’s been added to the principal, the amount is divided by the number of months in the duration of the loan to determine the amount of the monthly loan payment." (source)

 

For the SIP Loan offered to me, the monthly add-on rate of 0.59% for 3 years really leads to an actual interest rate of 21.24% of the loan amount:


(0.59% monthly add-on interest rate) x 36 months = 21.24% of the borrowed amount

21.24% x Php171,000 loaned amount = Php36,320.4 interest to be paid

Php36,320.4/ 36 months =  Php1,008.9 to be added to the monthly principal

Php171,000 / 36 months = Php4,750 monthly principal

Php4,750 + Php1,008.9 = Php5,758.9 monthly amortization


Now that I lay it out like this, it becomes clear to me that the puny 0.59% monthly add-on rate is not really a good deal after all. So dear phonebanker, thank you for calling, but I will have to pass on your offer.


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