A blended interest rate is the actual interest rate of the whole amount when parts of the amount have differing interest rates. Being able to calculate the blended interest rate is essential when deciding which loan you should take. It is important to remember that sometimes, taking out 2 or 3 loans with 2 different interest rates is cheaper than taking out 1 loan with 1 interest rate. However, to compare the various types of loans being offered properly, you must calculate the blended interest rate.
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Write down the entire amount of the loan you wish to take out. For example, use the number $20,000.
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Research the amount and interest rate of loans that you qualify for. For example, Bank A will give you Loan 1 of up to $5,000 at an interest rate of 6 percent. Bank B will give you Loan 2 of up to $12,000 at interest rate of 7.5 percent; Bank C will give you Loan 3 up to $20,000 at an interest rate of 8.0 percent.
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Find your different options to satisfy the loan amount you wish to take out. In our example, you have 3 options. Option 1 is Loan 1 for $5,000; Loan 2 for $12,000; and Loan 3 for $3,000. Option 2 is Loan 2 for $12,000 and Loan 3 for $8,000. Option 3: Loan 3 for $20,000.
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To find the blended interest rate, take the each amount and multiply by the interest rate and then divide the result by the total amount. For example: Blended Interest Rate for Option 1: {(5000 .06) + (12,000 .075) + (3000 .08)} / 20,000 = 0.072 or 7.2 percent Blended Interest Rate for Option 2: {(12,000 .075) + (8000 * .08)} / 20,000 = 0.077 or 7.7 percent Option 3: 8.0 percent
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Compare the interest rates after calculating the blended interest rates. In the example above, Option 1 has the lowest interest rate.
