Understanding Blended Rates: Optimize Your Loan Refinancing
A blended rate represents a combination of old and new interest rates on a loan, and is typically offered through the refinancing of existing loans. This rate is crucial for getting a clear picture of the true debt obligation when managing multiple loans with varying interest rates or the revenue from several streams of interest.
Blended rates are predominantly used in refinancing processes to grant a rate that is more favorable than a new loan but slightly higher than the original one. They also come into play when stacking additional debts, like a second mortgage.
Simplifying Blended Rates Calculation
Lenders often use blended rates to entice borrowers to refinance existing low-interest loans and to compute the pooled cost of funds for corporate debt. Essentially, blended rates provide a weighted average interest rate that reflects the aggregate interest rate on corporate debt.
For individual borrowers, the blended rate serves when refinancing personal loans or mortgages. Several online calculators are available to help consumers easily compute their new blended interest rates post-refinance.
Key Takeaways
- A blended rate combines previous and new interest rates into a single rate on a loan.
- These rates apply to refinance corporate debt and consumer loans like mortgages.
- Calculation involves determining the weighted average of the interest rates on the loans.
Real-World Examples of Blended Rates
Blended rates impact both corporate and personal loans. Here’s how to calculate them in real-world scenarios:
Corporate Debt
Companies often have varied types of debt. For instance, if a company owes $50,000 at a 5% interest rate and another $50,000 at a 10% rate, the blended rate calculation would be:
(50,000 x 0.05 + 50,000 x 0.10) / (50,000 + 50,000) = 7.5%
In cost-of-funds accounting, quantifying liabilities or investment income also uses blended rates. Suppose a company has two loans: one for $1,000 at 5% and another for $3,000 at 6%. At annual interest, it pays $50 for the first loan and $180 for the second. The blended rate is calculated as:
(50 + 180) / 4,000 = 5.75%
Imagine Company A, which announced its 2Q 2020 results with its $3.5 billion debt detailed in the earnings report, noting a blended interest rate of 3.76% for the quarter.
Personal Loans
To retain customers and up loan scales, banks offer blended rates. For example, with a $75,000 mortgage at a 7% rate and a current rate of 9%, a bank might propose an 8% blended rate for refinancing. The customer thus refinances for $150,000 at this new 8% rate.
Embrace the concept of blended rates to manage your debt obligations more effectively, making your refinancing strategies work to your advantage.
Related Terms: Refinancing, Weighted Average Interest Rate, Cost of Funds, Second Mortgage.
