What Is a Blended Rate?
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 are usually offered through the refinancing of existing loans that are charged a rate of interest that is higher than the old loan's rate, but lower than the rate on a brand-new loan.
This type of rate is calculated for accounting purposes to better understand the true debt obligation for multiple loans with different rates or the revenue from several streams of interest.
Blended rates are often used to understand the true interest rate paid when refinancing a loan, but it can also be used when adding additional debt, such as a second mortgage.
How Blended Rates Work
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. 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. There are several free online calculators available for consumers to compute their blended average interest rate after a refinance.
- 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 to consumer loans, such as a refinanced mortgage.
- To calculate the blended rate, most often you will take the weighted average of the interest rates on the loans.
Examples of Blended Rates
Blended rates can apply to refinanced corporate debt, or to personal loans taken out by individuals. Calculating the blended rate involves taking the weighted average of the interest rates on the loans.
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%. The total debt amount represents a 33.2% leverage for the company.
Banks use a blended rate to retain customers and increase loan amounts to 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 decide to refinance for $145,000 with a blended rate of 8%. They would still pay 7% on the initial $75,000 but only 8% on the additional $70,000.