What Is a Blended Rate?
Let me explain what a blended rate is—it's an interest rate on a loan that combines a previous rate with a new one. You'll see blended rates when refinancing existing loans, where the new rate is higher than your old one but lower than what you'd get on a completely new loan.
We use this for accounting to get a clear picture of your true debt from multiple loans with different rates, or even revenue from various interest streams.
Key Takeaways
Remember, a blended rate mixes the old and new rates on a loan. It works for refinanced corporate debt or consumer stuff like mortgages. To figure it out, you usually take the weighted average of those interest rates.
Important Notes
Blended rates help you understand the real interest you're paying after refinancing, but they also come into play when adding more debt, like a second mortgage.
How Blended Rates Work
Lenders use blended rates to push you to refinance your low-interest loans, and they also calculate the pooled cost of funds this way. For companies, it's the weighted average on their debt, giving the overall aggregate rate.
If you're an individual refinancing a personal loan or mortgage, this applies to you too. You can find free online calculators to compute your blended rate after refinancing.
Examples of Blended Rates
Blended rates show up in refinanced corporate debt or personal loans. You calculate them by taking the weighted average of the rates.
Corporate Debt
Companies often have multiple debts. Say a company has $50,000 at 5% and another $50,000 at 10%—the blended rate is (50,000 x 0.05 + 50,000 x 0.10) / 100,000 = 7.5%.
In accounting for cost of funds, it's used to quantify liabilities or income. For instance, with loans of $1,000 at 5% and $3,000 at 6%, annual interest is $50 and $180, so blended rate is (50 + 180) / 4,000 = 5.75%.
Hypothetically, if Company A reports a blended rate of 3.76% on $3.5 billion debt in their earnings, that's how they outline it on the balance sheet.
Personal Loans
Banks offer blended rates to keep customers and upsell bigger loans to reliable ones. For example, if you have a $75,000 mortgage at 7% and want to refinance when rates are 9%, they might give you 8% blended on a new $150,000 loan.
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