Blended Rate Calculator

1. What is the Blended Rate Calculator?

Definition: The Blended Rate Calculator determines the equivalent interest rate for multiple loans or debts with different balances and interest rates, combining them into a single rate for a given period.

Purpose: This tool helps borrowers understand the overall cost of multiple loans, such as mortgages or credit lines, to make informed financial decisions, especially when consolidating or adding new debt.

2. How Does the Calculator Work?

The calculator uses the following formula:

$ \text{Blended Rate} = \frac{\sum (\text{balances} \times \text{rates})}{\sum \text{balances}} $

Where:

$ \text{balances} $: Loan or debt amounts ($);
$ \text{rates} $: Annual interest rates for each loan (%);
$ \sum $: Summation of the respective terms.

Steps:

Enter the balance and interest rate for each loan.
Calculate the interest for each loan: balance × (rate / 100).
Sum all interests and all balances.
Divide the total interest by the total balance to get the blended rate.
Display the blended rate as a percentage and the total balance in currency format.

3. Importance of Blended Rate Calculation

Calculating the blended rate is essential for:

Financial Clarity: Simplifies understanding the combined cost of multiple loans with different rates.
Decision Making: Helps evaluate the impact of adding new debt, such as increasing a mortgage.
Cost Management: Assists in comparing loan offers or refinancing options to optimize interest expenses.

4. Using the Calculator

Example 1: Calculate the blended rate for three loans: $2,000 at 2%, $3,000 at 4%, and $200 at 3%:

Balances: $2,000, $3,000, $200; Rates: 2%, 4%, 3%;
Total Balance: $ 2000 + 3000 + 200 = 5200 $;
Interests: $ 2000 \times 0.02 = 40 $, $ 3000 \times 0.04 = 120 $, $ 200 \times 0.03 = 6 $;
Total Interest: $ 40 + 120 + 6 = 166 $;
Blended Rate: $ \frac{166}{5200} \approx 0.031923 = 3.192\% $;
Result: Total Balance: $5,200.00; Blended Rate: 3.192%.

Example 2: Calculate the blended rate for a $100,000 mortgage at 2.5% and an additional $20,000 at 4%:

Balances: $100,000, $20,000; Rates: 2.5%, 4%;
Total Balance: $ 100000 + 20000 = 120000 $;
Interests: $ 100000 \times 0.025 = 2500 $, $ 20000 \times 0.04 = 800 $;
Total Interest: $ 2500 + 800 = 3300 $;
Blended Rate: $ \frac{3300}{120000} = 0.0275 = 2.75\% $;
Result: Total Balance: $120,000.00; Blended Rate: 2.75%.

5. Frequently Asked Questions (FAQ)

Q: What is a blended rate?
A: A blended rate is the weighted average interest rate of multiple loans or debts, calculated based on their balances and rates.

Q: Why use a blended rate?
A: It simplifies the understanding of the combined cost of multiple loans, aiding in financial planning and decision-making.

Q: When is the blended rate useful?
A: It’s useful when consolidating loans, adding new debt, or comparing financing options to assess overall interest costs.