If you’ve ever been offered a car loan or personal loan with what seemed like a decent rate, you might have encountered add-on interest—an outdated method of calculating interest that can inflate what you pay by thousands. In 2025, as Australians face rising living costs and tighter lending standards, understanding this sneaky cost is more important than ever.
What Is Add-On Interest?
Add-on interest is a way lenders calculate your total interest by applying the annual rate to the entire principal for the full term of the loan, then adding that total interest amount to the principal and dividing it into equal repayments. Unlike reducing balance interest (where you pay less interest as your principal shrinks), add-on interest ignores the fact that you’re paying down your loan as you go. This means you’re charged interest on money you’ve already repaid.
- Example: Let’s say you borrow $10,000 for 3 years at an 8% add-on interest rate. The total interest is $2,400 ($10,000 x 8% x 3), making your total repayments $12,400—or $344 a month. But if you took a loan at an 8% reducing balance rate, your total interest would be closer to $1,300, and your monthly repayments would be lower.
In effect, the real cost of an add-on interest loan is much higher than the advertised rate suggests. In fact, an 8% add-on rate can equate to a 14%+ comparison rate on a reducing balance loan.
Where Are Add-On Interest Loans Still Used in Australia?
While many lenders have moved away from add-on interest, it still crops up in certain types of finance—especially in car yards, some payday loans, and with smaller non-bank lenders. It’s less common in mortgages or mainstream personal loans, but it hasn’t vanished entirely.
- Car dealership finance: Some car yards offer add-on interest loans, making the monthly payment look manageable but inflating the overall cost.
- Retail and payday loans: High-risk, short-term lenders sometimes use add-on interest to maximise their profit, especially for customers with poor credit.
With 2025’s tighter credit environment and Australians increasingly turning to alternative lenders, it pays to read the fine print and calculate the true cost before signing.
2025 Policy Updates and Consumer Protections
Following a wave of complaints and a 2024 ACCC review into predatory lending practices, the government introduced stricter disclosure rules for consumer loans in early 2025. Lenders must now clearly display the comparison rate—which factors in both interest and fees—on all loan offers. This helps level the playing field for borrowers comparing reducing balance and add-on interest loans.
In addition, ASIC has stepped up enforcement, especially in the automotive and payday lending sectors, targeting misleading advertising and requiring plain-language explanations of how interest is calculated. Some states, including Victoria and New South Wales, have introduced additional licensing requirements for credit providers using add-on interest models.
How to Protect Yourself from Add-On Interest in 2025
- Always ask for the comparison rate: This is your best tool for comparing apples with apples.
- Check the loan contract: If the interest is calculated on the original loan amount for the entire term, it’s an add-on interest loan.
- Use online calculators: Plug in the numbers to see the real cost of the loan—not just the monthly repayment.
- Consider alternatives: Credit unions, banks, and online lenders usually offer reducing balance interest, which is almost always cheaper.
- Report misleading practices: If you’re offered a loan that doesn’t clearly disclose costs, report it to ASIC or your state consumer authority.
The Bottom Line
Add-on interest is a relic of the past that still catches Australians out—especially in the used car and payday lending markets. With new 2025 disclosure rules, it’s easier than ever to spot and avoid these costly loans. Remember: the lowest monthly repayment isn’t always the best deal. Take a few extra minutes to compare comparison rates and protect your wallet from unnecessary interest.
