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What Is a Blended Rate?
A blended rate is an interest rate applied to a loan that merges the previous rate with a new rate. It is used primarily in refinancing. Blended rates help borrowers understand the true cost of debt when refinancing and are crucial for both consumer and corporate financial planning. The most common method of calculating a blended rate is through a weighted average of existing and new loan rates. Blended rates often apply to mortgages and corporate debt, providing financial flexibility and favorable terms.
Key Takeaways
- A blended rate combines a previous and a new interest rate on a refinanced loan.
- To calculate a blended rate, use the weighted average of interest rates on multiple loans.
- Blended rates apply to both corporate debts and personal loans, like mortgages.
- Refinancing with a blended rate can lower total interest payments compared to a new loan.
- Free online calculators can help consumers compute their blended rates after refinancing.
Important
Blended rates reveal the true interest when refinancing and clarify financials when adding debt like a second mortgage.
Understanding the Mechanics of Blended Rates
A blended rate is used by lenders to encourage borrowers to refinance existing low-interest loans and also used to calculate the pooled cost of funds. They also represent the weighted average interest rate on corporate debt. The resulting rate is considered the aggregate interest rate on corporate debt.
Blended rates apply when individuals refinance a personal loan or mortgage. There are several free online calculators available for consumers to compute their blended average interest rate after a refinance.
Practical Examples of Blended Rate Calculations
Blended rates apply to corporate debt or personal loans that are refinanced. Calculating the blended rate involves taking the weighted average of the interest rates on the loans.
Applying Blended Rates to Corporate Debt Scenarios
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%
Blended rates are used in accounting to quantify liabilities or investment income on balance sheets. 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%.
Using Blended Rates for Personal Loan Refinancing
Banks use a blended rate to retain customers and increase loan amounts to proven, creditworthy clients. For instance, if a customer has a $75,000 mortgage at 7% and refinancing is at 9%, a bank may offer 8%. The borrower could then decide to refinance for $150,000 with a blended rate of 8%.
The Bottom Line
A blended rate is an interest rate determined by combining a previous and new rate, and is commonly used to provide a middle-ground interest option. It’s calculated using a weighted average method. Blended rates are used for corporate debt and personal loans, as in corporate debt restructuring and with refinanced mortgages. Consumers and companies can leverage blended rates to potentially lower their debt costs or manage multiple loans effectively. Keep in mind that while a blended rate might offer savings compared to new loan rates, it’s often higher than the original rate. Borrowers should assess their overall financial strategy when considering refinancing options.
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