What Is a Blended Rate?
A blended rate is an interest rate charged on a loan that addresses the combination of a previous rate and another rate. Blended rates are generally offered through the refinancing of existing loans that are charged a rate of interest that is higher than the old loan's rate, yet lower than the rate on a fresh out of the box new loan.
This type of rate is calculated for the end goal of accounting to better grasp the true debt obligation for numerous loans with various rates or the revenue from several floods of interest.
Blended rates are frequently used to comprehend the true interest rate paid while refinancing a loan, yet they can likewise be utilized while adding extra debt, like a subsequent mortgage.
How Blended Rates Work
A blended rate is utilized by lenders to urge borrowers to refinance existing low-interest loans and furthermore used to work out the pooled cost of funds. These rates likewise address a weighted average interest rate on corporate debt. The subsequent rate is viewed as the aggregate interest rate on corporate debt.
Blended rates likewise apply to individual borrowers who refinance a personal loan or mortgage. There are several free online mini-computers accessible for consumers to register their blended average interest rate after a refinance.
Instances of Blended Rates
Blended rates can apply to refinanced corporate debt, or to personal loans taken out by individuals. Working out the blended rate includes taking the weighted average of the interest rates on the loans.
A few companies have more than one type of corporate debt. For instance, in the event that a company has $50,000 in debt at a 5% interest rate and $50,000 in debt at a 10% interest rate, the total blended rate would be calculated as:
(50,000 x 0.05 + 50,000 x 0.10)/(50,000 + 50,000) = 7.5%
The blended rate is likewise utilized in cost-of-funds accounting to evaluate liabilities or investment income on a balance sheet. For instance, in the event that a company had two loans, one for $1,000 at 5% and the other for $3,000 at 6%, and it paid the interest off each month, the $1,000 loan would charge $50 following one year, and the $3,000 loan would charge $180. The blended rate would in this manner be:
(50 + 180)/4,000 = 5.75%
As another speculative model, assume Company A declared 2Q 2020 outcomes with a note in the earnings report on the balance sheet section that illustrated the company's blended rate on its $3.5 billion debt. Its blended interest rate for the quarter was 3.76%.
Banks utilize a blended rate to hold customers and increase loan adds up to proven, financially sound clients. For instance, in the event that a customer currently holds a $75,000 mortgage with a 7% interest rate and wishes to refinance when the current rate is 9%, the bank could offer a blended rate of 8%. The borrower could then choose to refinance for $150,000 with a blended rate of 8%.
- A blended rate is an interest rate charged on a loan that addresses the combination of a previous rate and another rate.
- To work out the blended rate, most frequently you will take the weighted average of the interest rates on the loans.
- Blended rates can apply to refinanced corporate debt, or to consumer loans, like a refinanced mortgage.