Blended Rate

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.

How Blended Rates Work

A blended rate is used by lenders to encourage borrowers to refinance existing low-interest loans
and is 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.

KEY TAKEAWAYS
● 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.

Corporate Debt

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%.

Personal Loans

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 $150,000 with a blended rate of 8%.