Average Balance

DEFINITION of 'Average Balance'

The balance on a loan or depositary account. A simple average balance is calculated by dividing the beginning balance plus the ending balance by two.

A weighted average balance will take into account how long the balance remained at specific levels during the measurement period, which is typically a month or a financial quarter long.

BREAKING DOWN 'Average Balance'

Average balance is more commonly used when referring to an average daily balance, particularly when charging interest on loans. Since banks are not permitted to charge interest on interest, any payments are applied first to interest payments due, and then to principal.

For investors who trade on margin accounts, the average balance may be used to determine margin requirements or any margin calls that the brokerage makes.

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