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Weighted Interest Rate Formula:
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A weighted interest rate calculates the overall interest rate when you have multiple loans or investments with different rates and proportions. It provides a comprehensive view of your total interest cost or return by accounting for the relative size of each component.
The calculator uses the weighted average formula:
Where:
Explanation: Each interest rate is multiplied by its corresponding weight (proportion of the total), and these products are summed to get the overall weighted rate.
Details: Calculating weighted interest rates is essential for portfolio management, loan consolidation analysis, investment performance evaluation, and financial planning. It helps in making informed decisions about debt management and investment strategies.
Tips: Enter up to three interest rates as percentages and their corresponding weights as proportions (decimal values between 0 and 1). The sum of all weights must equal 1.0 for accurate calculation.
Q1: Why use weighted interest rate instead of simple average?
A: Weighted average accounts for the relative size or importance of each rate, providing a more accurate representation of the overall interest impact.
Q2: What if I have more than three rates?
A: You can calculate manually by extending the formula: Weighted Rate = (Rate1×Weight1) + (Rate2×Weight2) + ... + (RateN×WeightN).
Q3: How do I determine the weights?
A: Weights are typically based on the proportion of total principal, investment amount, or loan balance that each rate applies to.
Q4: Can this be used for both loans and investments?
A: Yes, the weighted rate calculation works for both interest expenses (loans) and interest income (investments).
Q5: What if my weights don't sum to exactly 1.0?
A: The calculator requires weights to sum to 1.0 for accuracy. If they don't, normalize your weights by dividing each by the total sum.