How To Calculate Weighted Interest Rate

Weighted Interest Rate Formula:

\[ \text{Weighted Rate} = \frac{\sum(P_i \times R_i)}{\sum P_i} \]

Weighted Interest Rate:

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1. What is Weighted Interest Rate?

The weighted interest rate calculates the average interest rate across multiple loans or investments, where each rate is weighted by its principal amount. This provides a more accurate representation of your overall interest burden or return than a simple average.

2. How Does the Calculator Work?

The calculator uses the weighted average formula:

\[ \text{Weighted Rate} = \frac{\sum(P_i \times R_i)}{\sum P_i} \]

Where:

\( P_i \) — Principal amount of loan/investment i
\( R_i \) — Interest rate of loan/investment i (%)
\( \sum \) — Summation across all loans/investments

Explanation: The formula calculates the proportion of each loan/investment relative to the total and applies the appropriate weight to each interest rate.

3. Importance of Weighted Interest Rate

Details: Calculating weighted interest rate is crucial for financial planning, debt management, investment analysis, and comparing different financing options. It helps understand the true cost of multiple loans or the actual return on multiple investments.

4. Using the Calculator

Tips: Enter the principal amount and interest rate for each loan or investment. Click "Add Another Loan/Investment" to include additional entries. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Why use weighted average instead of simple average?
A: Weighted average accounts for the different sizes of loans/investments, giving more importance to larger amounts, which provides a more accurate overall rate.

Q2: Can I use this for both loans and investments?
A: Yes, the formula works the same way for calculating weighted average interest rates on both debts (loans) and assets (investments).

Q3: How does this help in debt management?
A: It helps you understand your true average interest rate across all debts, which is useful when prioritizing which loans to pay off first.

Q4: What if I have variable interest rates?
A: For variable rates, you may need to calculate the weighted average periodically as rates change, or use an estimated average rate.

Q5: Can this calculator handle different currencies?
A: The calculator can handle any currency as long as all principal amounts are in the same currency unit.