Blended Rate
What Is a Blended Rate, and How Does It Work?
A blended rate is a loan interest rate that combines a prior rate and a new rate. Blended rates are most commonly given when existing loans are refinanced at a rate that is greater than the previous loan's rate but lower than the rate on a brand-new loan.
This rate is used in accounting to determine the genuine debt obligation for numerous loans with varying interest rates or the revenue from several streams of interest.
Blended rates are frequently used to figure out what the real interest rate is when refinancing a loan, but they may also be utilised when taking on new debt, such as a second mortgage.
What Are Blended Rates and How Do They Work?
Lenders utilise a blended rate to entice borrowers to refinance current low-interest loans, as well as to determine the pooled cost of funds. A weighted average interest rate on business debt is also included in these figures. The resultant rate is referred to as the corporate debt aggregate interest rate.
Individual borrowers who refinance a personal loan or a mortgage are likewise subject to blended rates. Consumers can calculate their blended average interest rate following a refinancing using many free internet tools.
TAKEAWAYS IMPORTANT
A blended rate is a loan interest rate that combines a prior rate and a new rate.
Refinance business debt or consumer loans, such as a refinanced home, can both benefit from blended rates.
The weighted average of the interest rates on the loans is commonly used to compute the blended rate.
Blended Rates Examples
Individuals who take out personal loans or refinance business debt may be subject to blended rates. The weighted average of the loan interest rates is used to get the blended rate.
Debt owed by corporations
Some businesses have many types of corporate debt. For example, if a corporation has $50,000 in debt with a 5% interest rate and $50,000 in debt with a 10% interest rate, the total blended rate is computed as follows:
50,000 x 0.05 + 50,000 x 0.10) / (50,000 + 50,000) = 7.5%
In cost-of-funds accounting, the blended rate is also used to measure liabilities or investment income on a balance sheet. If a corporation had two loans, one for $1,000 at 5% and the other for $3,000 at 6%, and paid the interest off every month, the $1,000 loan would cost $50 after a year while the $3,000 loan would cost $180. As a result, the blended rate would be:
(50 + 180) / 4,000 = 5.75%
Consider Company A's 2Q 2020 results, which included a remark in the earnings report's balance sheet section that detailed the company's blended rate on its $3.5 billion debt. Its quarterly blended interest rate was 3.76 percent.
Banks utilise a blended rate to keep consumers and boost loan amounts for proven, creditworthy customers. For example, if a client currently has a $75,000 mortgage with a 7% interest rate and wants to refinance while the current rate is 9%, the bank may offer an 8 percent blended rate. The borrower then has the option of refinancing for $150,000 at an 8% blended rate.
