Understanding Blended Rates
A blended rate calculator helps you determine the average interest rate across multiple loans. This is particularly useful when managing several debts at different interest rates and wanting to understand your overall borrowing cost.
What is a Blended Rate?
The blended rate is a weighted average that considers both the amount and interest rate of each loan. Unlike a simple average, it gives more weight to larger loans, providing a more accurate picture of your actual borrowing costs.
Formula
The blended rate is calculated using:
[\text{Blended Rate} = \frac{\sum(\text{Loan Amount} \times \text{Rate})}{\text{Total Loan Amount}} \times 100]
Where you multiply each loan amount by its rate (as a decimal), sum these products, and divide by the total of all loan amounts, then multiply by 100 to get a percentage.
Example Calculation
Consider three loans:
- Loan 1: $8,000 at 4%
- Loan 2: $5,000 at 6%
- Loan 3: $7,000 at 5.5%
Step 1: Calculate the weighted sum
- (8,000 × 0.04) + (5,000 × 0.06) + (7,000 × 0.055) = 320 + 300 + 385 = 1,005
Step 2: Calculate total loan amount
- 8,000 + 5,000 + 7,000 = 20,000
Step 3: Calculate blended rate
- (1,005 ÷ 20,000) × 100 = 5.03%
When to Use This Calculator
Debt Consolidation: Evaluate whether consolidating multiple loans at different rates into a single loan makes financial sense by comparing the new rate to your blended rate.
Refinancing Decisions: Determine if a refinancing offer beats your current blended rate across all loans.
Portfolio Analysis: Understand the effective interest rate on your total debt portfolio for budgeting and financial planning.
Tips for Using the Blended Rate
- Remember that the blended rate is an average - individual loans still maintain their specific rates
- Consider loan terms and payment schedules, not just rates, when making consolidation decisions
- The blended rate helps with comparisons but doesn't account for fees, penalties, or other loan terms
- Use this calculation as one factor in your overall debt management strategy