Blended Rate

Blended Rate refers to the consolidated interest rate of an existing loan and an additional loan taken by the customer despite the old loan not being fully repaid. The purpose of calculating a blended rate is to provide a comprehensive measure that reflects the combined effect of different speeds or costs.

Lenders offer it to both personal loans and corporate customers to refinance their loans. Many borrowers with numerous loans get to see the overall loan interest rates paid by them. It also allows them to get a reduced blended rate leading to lesser overall costs on the interest rate. Moreover, investors having various portfolios of different interest rates use it to sense the performance of all their portfolios.

• The term "Blended Rate" indicates the overall interest rate on a combined loan that includes a previous loan that hasn't been entirely paid off and a new loan taken out by the borrower.
• It aids in calculating the effective interest rate that must be paid on a refinanced loan.
• This rate card represents single or flat rate charges for all the services provided by the service providers. In contrast, Tiered Rate Card represents varying rate charges for the services offered by the service providers based on their quantity or volume of services.

A blended rate is an average rate calculated by combining multiple rates or costs, considering their respective weights or proportions. Furthermore, this rate provides a consolidated measure representing the overall rate or cost, considering the different components involved.

Moreover, this rate aids investors with diversified investments across various asset classes to analyze and evaluate the performance of their overall asset portfolio. Furthermore, accountants use it to understand actual debt obligations, which are related to multiple loans having different rates plus the net revenue generated from various sources of interest. Besides, one can also understand the real interest rate being paid due to loan refinancing and a second loan like a mortgage.

 Additionally, instead of charging clients based on individual rates for each person or resource involved in blended rate billing, a single rate is applied to the entire team or project. Hence, this simplifies the billing process and provides a standardized rate for the services rendered.

In addition, this rate is utilized in the computation of pooled cost of funds. While comparing two similar term loans, their arithmetic mean of interest rates give the combined rate according to the loan size. However, if one considers dissimilar loans, the annual interest rate method gets used to find the combined interest rate for such loans. Likewise, many banks tend to offer these rates to their trustworthy and high-net-worth customers to increase their loans plus retain these customers.

Furthermore, in the case of overtime, blended rate overtime means the combination of wages of staff doing different works and drawing different salaries for their work.

Finally, firms use this rate; in cost-of-funds accounting, the blended rate measures liabilities or returns on investments appearing on a balance sheet.

The formula for blended rate depends upon the factors for which it gets used.  Moreover, the blended rate calculator is a tool used to calculate the average or blended interest rate of multiple loans or investments. Therefore the formula used to calculate these rates is shown below.

Blended Rate= (Sum of (r * a)) / (Sum of a)

In this formula:

• r' represents the interest rate of each loan or investment.
• 'a' represents the respective amounts or investments associated with each interest rate.
• 'Sum of (r * a)' denotes the sum of the products obtained by multiplying each interest rate with its corresponding amount.
• 'Sum of a' represents the sum of all the amounts or investments.

Therefore, to calculate the blended rate, you multiply each interest rate by its corresponding amount, sum up those products, and divide the result by the sum of all the amounts. Thus, this will give us the average or blended rate across the loans or investments.

Let us use a few examples to understand the topic.

Example # 1

Suppose Christiania has three loans with the following details:

Loans

1: Amount = $10,000, Interest Rate = 5%

  2: Amount = $15,000, Interest Rate = 7%

3: Amount = $20,000, Interest Rate = 6.5%

To calculate the blended rate, we will use the formula:

Blended Rate = (Sum of (r * a)) / (Sum of a)

Step 1: Calculate the sum of the products (r * a):

Sum of (r * a) = (5% * $10,000) + (7% * $15,000) + (6.5% * $20,000) = $500 + $1,050 + $1,300 = $2,850

Step 2: Calculate the sum of the amounts (a):

Sum of a = $10,000 + $15,000 + $20,000 = $45,000

Step 3: Plug the values into the formula and calculate the blended rate:

        = $2,850 / $45,000 = 0.0633 or 6.33%

Therefore, the blended rate for the given loans is 6.33%.

This calculation method considers the loan amounts and their respective interest rates to provide an average or blended rate.

Example #2

Suppose Lauren has two investments with the following details:

Investment 1: Amount = $50,000, Interest Rate = 4% 

Investment 2: Amount = $75,000, Interest Rate = 6.5%

To calculate the blended rate, we will use the formula:

Blended Rate = (Sum of (r * a)) / (Sum of a)

Step 1: Calculate the sum of the products (r * a):

Sum of (r * a) = (4% * $50,000) + (6.5% * $75,000) = $2,000 + $4,875 = $6,875

Step 2: Calculate the sum of the amounts (a):

Sum of a = $50,000 + $75,000 = $125,000

Step 3: Plug the values into the formula and calculate the blended rate:

           = $6,875 / $125,000 = 0.055 or 5.5%

Therefore, the blended rate for the given investments is 5.5%.

Hence, this example demonstrates how this rate calculation can also be applied to investments, where the amounts and respective interest rates are considered to determine the average or blended Rate.

Businesses use both as pricing models to set the prices of their products. However, they have specific differences too as two as depicted in the table below;

This article has been a guide to Blended Rate and its meaning. We explain its formula, and examples, and compare the blended rate card with the tiered rate card. You may also find some useful articles here.

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