The Average Weighted Interest Rates

Loans, debts, lines of credit and various investment instruments all come with interest rates. These interest rates help to measure the continuing impact that the debt or investment is having on your finances. By calculating an average weighted interest rate for various items, you can get a clearer understanding of where you stand financially and plan your next move.

Definition of Interest

Interest is the amount of money someone must pay to borrow or owe money over a certain period of time. A common measurement for interest is annual percentage rate, or APR. This is the percentage of the principal, the original amount owed or borrowed, or the outstanding balance that the borrower must pay per year. When lenders see a borrower as someone who is high-risk, they assess high interest rates in order to cover that risk. When they see that a borrower is low-risk, they assess low interest rates to compete with other lenders. This same principal applies when someone puts money into an interest-bearing account or security, as that investor is essentially letting someone else borrow her money.

Investment and Debt

Sometimes, it may become necessary to consolidate multiple debts into a single measurement. An investor may do this with a collection of debt instruments that he holds, such as corporate bonds. This gives a consolidated figure regarding the return that the investor is enjoying from the bonds. Another common example would be calculating debt. For instance, a debtor may decide to take a collection of debts owed such as a home loan, a car loan, student loans and credit card balances and group them together to see how much he is paying in interest.

Calculation

To calculate the average weighted interest for your debts or debt securities, first multiply the value of each item's principal or amount owed by the interest rate for that item. Add these figures together. This is the total per loan weight factor. Now, find the sum of all principal or amounts owed. Divide the total per loan weight factor by the sum of all principal or amounts owed. Round it to the nearest 1/8 percent. This is your average weighted interest rate.

Uses

Calculating the average weighted interest of your debts or investments can help you to make intelligent financial decisions. For instance, if you are contemplating getting a debt consolidation loan, you can use the average weighted interest weight of your debts to see if the interest rate for the debt consolidation loan is lower than what you are currently paying. Also, if you are contemplating between using funds to invest in an interest-bearing security or pay off your debts, you can compare what you would make from the investment to what you are losing in interest payments. If the average weighted interest rate for your debts is higher than what you would make from the investment, you should pay off your debts first.