What is a Weighted Average?

A weighted average is a calculation that reflects the relative importance or frequency of different values in a data set by assigning each value a specific weight before averaging. Unlike a simple average where all values are treated equally, a weighted average gives more influence to values with higher weights, making it particularly useful when certain data points occur more frequently or carry greater significance.

What is a Weighted Average Interest Rate?

A weighted average interest rate is the average rate of interest paid on a group of loans or debts, calculated by assigning each individual interest rate a weight based on the size of the corresponding loan or principal amount. This approach provides a more accurate representation of the overall cost of borrowing, as it takes into account that larger loans have a greater financial impact than smaller ones. It is commonly used by businesses and individuals to assess the blended cost of financing from multiple sources, such as mortgages, credit lines, or bonds, and is essential for budgeting, refinancing decisions, and financial analysis.

How to Calculate the Weighted Average Interest Rate

The calculation for the weighted average interest rate 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
= Weighted average interest rate

This calculation is frequently used by individuals who are considering consolidating their debts, and want to understand the weighted average interest rate of those debts before doing so, to see if they will be getting a good deal from the consolidation lender.

Example of the Weighted Average Interest Rate Calculation

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