Average Interest Rates

 

 

Average interest rates are calculated to find the average cost of the total debt of an individual over a specific time period or the average earnings on the total amount invested by an individual in varied saving schemes. These rates are useful for making comparisons and then deciding on the future course of action.[br]

 

Average interest rates on loans taken are calculated on the total un-matured interest bearing debt and help a consumer know the right time to consolidate or payoff. These rates are also helpful in choosing from the various credit options available in the market, besides helping one take a decision regarding the various saving options.

 

Average Interest Rates: Useful for Comparisons

Interest rates are the main mechanism for influencing economic activity. The calculation of average interest rates on one’s total debt over a specific period of time can help one in deciding about whether to move or shift the debt from a high cost source to a low cost one. Similarly, a comparison of the actual interest rate being earned on an investment scheme with the average interest rates can simplify the investment decisions and help one maximize interest earnings.

 

Quite often, the interest rates being paid by an individual on a loan or credit card may be higher than the average prevailing interest rates. This could be because of the individual’s credit position or a higher credit limit or any other reason. A comparison of average interest rates can make an individual more aware and help him take his debt decisions more carefully. Similarly, a person with a good credit rating may be able to borrow funds at interest rates that are lower than the average rates.[br]

 

Weighted Average Interest Rates

Weighted average interest rates are calculated to replace multiple loans with one consolidated loan that has an interest rate that is lower than the highest interest but higher than the lowest interest. The calculation of the weighted average interest rates involves certain steps:

 

ü      Multiply each loan by its interest rate to obtain the per loan weight factor.

ü      Add the per loan weight factors of all loans

ü      Add all the loan amounts

ü      Divide the total per loan weight factor with the total loan amounts to get the weighted average interest rate.