3 Steps To Calculate The Weighted Average
The weighted average is determined by the current balance and the current interest rate of each loan that is being consolidated. The higher the balance, the greater "weight" is placed on the interest rate of that loan. The following shows a weighted average interest rate calculation for a loan application received by the lender :
Step 1
Multiply the outstanding balance of each loan to be consolidated by that loan's current interest rate. A variable rate loan should be included in the calculation at the rate at which it is currently accruing. (If you are currently receiving a .25% interest rate reduction due to your monthly payments being automatic, the rate we use is the rate prior to the .25% deduction)
Example :
Before you set up automatic payments from your checking or savings account, your interest rate was 5.5%. You signed up for automatic payments so your interest rate went down to 5.25%. The rate used to calculate your interest rate on your Consolidation loan is 5.5%.
Example :
Outstanding loan balances are $3,500, $3,200, and $5,500 respectively---for a total of $12,200. The current interest rates for the loans are 7%, 5%, and 9%, respectively.
$3,500 x .07 = $245
$3,200 x .05 = $160
$5,500 x .09 = $495
Step 2
Add the results of all calculations made under Step 1. Then divide this sum by the outstanding balance of all loans being consolidated.
Example :
$245 + $160 + $495 = $900
$900 ÷ $12,200 = .07377 or 7.377%
Step 3
Round the result of Step 2 up to the nearest one-eigth percent, not to exceed 8.25%.
Example :
7.377% is rounded up to 7.5%