What is a blended rate?
A blended rate (also called a blended interest rate) is a single interest rate that represents the combined cost of two or more loans with different interest rates. Lenders and accountants use it to express the aggregate interest cost or revenue when debt instruments at different rates are pooled or when an existing loan is partly refinanced at a new rate.
Key idea in plain terms
– If you have multiple balances that each carry their own interest rate, the blended rate is the weighted average of those rates, with weights equal to the outstanding principal amounts.
– It is a bookkeeping and decision tool: it shows the “overall” rate you are effectively paying (or receiving) across several loans, ignoring timing and fee details unless explicitly included.
How to calculate a blended rate (formula)
Blended rate = (Σ (principal_i × rate_i)) / (Σ principal_i)
Assumptions and caveats
– This formula assumes simple weighting by outstanding principal and fixed nominal interest rates. It does not account for differences in compounding frequency, fees, prepayment penalties, amortization patterns, or timing of cash flows.
– When loans have different amortization schedules or variable rates, you may need a more detailed present-value or cash-flow analysis.
Step-by-step checklist when evaluating a blended rate
1. List each loan’s outstanding principal and current nominal interest rate.
2. Confirm whether rates are fixed or variable and note any upcoming rate changes.
3. Decide whether to include fees, points, or origination charges in the effective cost.
4. Apply the weighted-average formula (principal × rate) summed, divided by total principal.
5. Compare the blended rate to the new refinance offer or market rates net of fees.
6. Consider amortization effects: compute total interest paid over comparable time horizons if needed.
7. If unsure, run a cash-flow (present-value) model or use a refinance calculator to include compounding and timing.
Worked numeric examples
Example 1 — Simple corporate debt
– Loan A: $50,000 at 5.0%
– Loan B: $50,000 at 10.0%
Calculate:
Total principal = $50,000 + $50,000 = $100,000
Weighted interest = ($50,000 × 0.05) + ($50,000 × 0.10) = $2,500 + $5,000 = $7,500
Blended rate = $7,500 / $100,000 = 0.075 = 7.5%
Example 2 — Accounting illustration with different balances
– Loan A: $1,000 at 5.0% → interest for one year = $1,000 × 0.05 = $50
– Loan B: $3,000 at 6.0% → interest for one year = $3,000 × 0.06 = $180
Total interest = $50 + $180 = $230
Total principal = $1,000 + $3,000 = $4,000
Blended rate = $230 / $4,000 = 0.0575 = 5.75%
Example 3 — Refinance scenario (conceptual)
– Borrower has $75,000 mortgage at 7% and faces an option to refinance at 9% for a new full balance of $150,000. A lender might propose a blended offer of 8% on the bigger, refinanced balance to make refinancing attractive to the existing borrower while pricing in higher current rates. Whether that blended offer is better depends on fees, term, and amortization; compute total interest over the relevant horizon before deciding.
When blended rates are commonly used
– Corporate debt reporting: to present an aggregate “cost of debt” on balance sheets or in earnings notes.
– Refinancing decisions: to show what the borrower would effectively pay if some old debt is combined with new borrowing.
– Personal borrowing: when adding a second mortgage or combining different consumer loans into one product.
Practical tips
– Always include fees and closing costs when comparing a blended refinance offer to the status quo—these can change the effective rate materially.
– For variable-rate or staggered maturities, consider cash-flow modeling or an internal rate of return (IRR) approach rather than a simple weighted average.
– Use an online blended-rate or refinance calculator to test scenarios, but check inputs carefully.
Reputable sources for further reading
– Investopedia — Blended Rate: https://www.investopedia.com/terms/b/blended-rate.asp
– Consumer Financial Protection Bureau (CF
– Consumer Financial Protection Bureau (CFPB) — Homeownership, mortgages, and refinancing guides: https://www.consumerfinance.gov/owning-a-home/
– Federal Reserve — Consumer information on loans, interest rates, and managing debt: https://www.federalreserve.gov/consumer-help.htm
– Bankrate — Refinance and blended-rate calculators and comparative articles: https://www.bankrate.com/calculators/refinance.aspx
– Federal Deposit Insurance Corporation (FDIC) — Consumer loan basics and comparison tips: https://www.fdic.gov/consumers/
Educational disclaimer: This content is for educational purposes only and does not constitute individualized financial, tax, or legal advice. Always verify calculations, read full loan disclosures, and consult a qualified professional before making borrowing or refinancing decisions.