What is a blended rate?
An interest rate that is imposed on a loan is referred to as a blended rate, and it is a rate that is a mix of an earlier rate and a currently applicable rate. Blended rates are typically made available through refinancing existing loans, which results in the interest rate being calculated to be greater than the rate on the previous loan but lower than the rate on a brand accounting purpose. This rate type better understands the actual debt obligation for several loans with varying interest rates or the revenue from multiple sources of interest.
How Blended Rates Work
Lenders use a blended rate to encourage borrowers to refinance existing low-interest loans, which is also used to calculate the pooled cost of funds. These rates also represent a weighted average interest rate on corporate debt. The resulting rate is considered the aggregate interest rate on corporate debt. Blended rates also apply to individual borrowers who refinance a personal loan or mortgage. Several free online calculators are available for consumers to use to compute their blended average interest rate after a refinance.
Examples of Blended Rates
Blended rates can apply to refinanced corporate debt or personal loans taken out by individuals. Calculating the blended rate involves taking the weighted average of the interest rates on the loans.
Corporate Debt
Some companies have more than one type of corporate debt. For example, if 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 also used in cost-of-funds accounting to quantify liabilities or investment income on a balance sheet. For example, if 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 every month, the $1,000 loan would charge $50 after one year, and the $3,000 loan would charge $180. The blended rate would thus be:
(50 + 180) / 4,000 = 5.75%
As another hypothetical example, suppose Company A announced 2Q 2020 results with a note in the earnings report on the balance sheet section that outlined the company’s blended rate on its $3.5 billion debt. Its blended interest rate for the quarter was 3.76%.
Personal Loans
Banks use a blended rate to retain customers and increase loan amounts for proven, creditworthy clients. For example, if 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 might offer a blended rate of 8%. The borrower could then refinance for $150,000 with a blended rate of 8%.
Conclusion
- A blended rate is an interest rate charged on a loan that represents the combination of a previous rate and a new rate.
- Blended rates can apply to refinanced corporate debt or consumer loans, such as refinanced mortgages.
- Most often, to calculate the blended rate, you will take the weighted average of the interest rates on the loans.
