Legal Definitions - block interest

Block Interest

Block interest, also known as add-on interest, is a method of calculating the total interest due on a loan where the entire interest amount for the full duration of the loan is determined at the very beginning and then added to the original principal amount. The borrower then repays this combined total (the initial principal plus the full, pre-calculated interest) in equal installments over the loan term. This means that the interest is always calculated based on the original principal balance, regardless of how much principal has already been repaid through subsequent payments. As a result, the effective interest rate can be significantly higher than if interest were calculated on the declining principal balance.

• Example 1: Car Loan Financing

  Imagine a consumer takes out a $25,000 car loan to be repaid over 60 months (5 years) with a 6% block interest rate. The lender calculates the annual interest as 6% of $25,000, which is $1,500. For the full five-year term, the total interest would be $1,500 multiplied by 5 years, equaling $7,500. This $7,500 is immediately added to the $25,000 principal, making the total amount to be repaid $32,500. The borrower then makes 60 equal monthly payments based on this $32,500 total. This illustrates block interest because the $7,500 interest charge is fixed at the outset, calculated on the original $25,000, and does not decrease even as the borrower pays down the principal over time.

• Example 2: Appliance Store Financing

  A customer purchases a new refrigerator for $2,000 and finances it through the store over 24 months (2 years) using a financing plan with an 8% block interest rate. The store calculates the annual interest as 8% of $2,000, which is $160. For the two-year term, the total interest is $160 multiplied by 2 years, totaling $320. This $320 is added to the $2,000 purchase price, so the customer owes a total of $2,320, which is then divided into 24 equal monthly payments. This is a clear example of block interest because the entire $320 interest charge is determined upfront based on the initial $2,000 principal, and the monthly payments remain constant, reflecting this fixed interest amount throughout the repayment period.

• Example 3: Small Business Equipment Lease-to-Own

  A small landscaping company enters into a lease-to-own agreement for a new commercial mower valued at $10,000, with a repayment term of 36 months (3 years) and a 7% block interest rate. The financing company calculates the annual interest as 7% of $10,000, which is $700. Over the three-year term, the total interest charged is $700 multiplied by 3 years, amounting to $2,100. This $2,100 is added to the $10,000 equipment cost, making the total obligation $12,100, which the company repays in 36 equal monthly installments. This demonstrates block interest because the full $2,100 interest amount is "blocked" onto the principal from the start, and the monthly payments are structured to repay this combined fixed sum, without the interest portion adjusting as the principal balance is reduced.