Calculating the weighted average interest rate

The weighted average interest rate is the aggregate rate of interest paid on all debt. The calculation for this percentage is to aggregate all interest payments in the measurement period, and divide by the total amount of debt. The formula is:

Aggregate interest payments ÷ Aggregate debt outstanding

For example, a business has a $1,000,000 loan outstanding on which it pays a 6% interest rate. It also has a $500,000 loan outstanding on which it pays an 8% interest rate. The annual amount paid on the first loan is $60,000, and the annual amount paid on the second loan is $40,000. This information results in the following calculation of the weighted average interest rate on the firm’s debt:

($60,000 interest + $40,000 interest) ÷ ($1,000,000 loan + $500,000 loan)

= $100,000 interest / $1,500,000 loan

= 6.667%  weighted average interest rate