8. Finance charge calculation - The add-on method The add-on method is a widely used technique for computing interest on installment loans. With the add-on method, interest is calculated by applying an interest rate to the amount borrowed times the number of years in the loan term. The following formula is used to calculate the amount of add-on interest: I = PRT Or I (Interest) = P (Principal Amount Borrowed) x R (Interest Rate) * T (Time of Loan in Years) Consider the following example: Assume that Sondra Xiang from Honolulu, Hawaii, borrows $2,500 for three years at 8% add-on interest to be repaid in monthly installments. Use the add-on equation I = PRT, to calculate Sondra's finance charge in dollars: $ Now add the interest in dollars to the original amount borrowed (the principal). The total amount that Sondra must repay is $ Divide the total amount owed by the number of monthly payments (35 payments) to obtain Sondra's monthly payment. (Round the payment to the nearest penny.) Sondra must make 36 monthly payments of $ each