Understanding the Weighted Average Interest Rate [Business Credit and Assistance]
Definition & Meaning
The weighted average interest rate is a calculation used to determine the average interest rate of a group of loans, known as a pool. This rate is derived by taking each loan's interest rate, multiplying it by the proportion of the loan's outstanding principal compared to the total outstanding principal of all loans in the pool. The resulting values are then summed to arrive at the overall weighted average interest rate. This rate can change over time due to factors like loan defaults, prepayments, and regular repayments.
Legal Use & context
This term is primarily used in the context of business loans, particularly those backed by the Small Business Administration (SBA). It is relevant in financial and lending practices, where understanding the weighted average interest rate can help businesses make informed borrowing decisions. Users can manage related forms and procedures through platforms like US Legal Forms, which provide templates drafted by legal professionals.
Real-world examples
Here are a couple of examples of abatement:
For example, if a loan pool consists of three loans with interest rates of 5%, 6%, and 7%, and their respective outstanding principal amounts are $100,000, $200,000, and $300,000, the weighted average interest rate would be calculated based on these figures. (Hypothetical example.)