Calculate Equivalent Loan Rate: $1,598 @ 6.8% & $6,680 @ 3.8%

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In summary, an equivalent loan rate is a single interest rate that would result in the same total interest paid as multiple loans with different rates and amounts. It is calculated using a formula that takes into account the amount, interest rate, and term of each individual loan. This is important for comparing loan options and understanding the true cost of loans. The equivalent loan rate can change over time if the individual loans' interest rates or terms change. By using the equivalent loan rate, borrowers can prioritize paying off loans with higher interest rates to potentially save money in the long run.
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KingNothing
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Hi guys, it's 3 AM so don't judge me. I'm doing some accounting work with my student loans and I want you to confirm something for me:

If I have two loans:
$1,598 @ 6.8% F-APR
$6,680 @ 3.8% F-APR

Then the 'equivalent' single loan would be:
$8,278 @ 4.38% F-APR

Correct? I used a weighted average of the interest rates, using the principal amount as the weight.
 
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  • #2
Yes, that's what I get.
 

1. What is an equivalent loan rate?

An equivalent loan rate is the single interest rate that, when applied to the full amount of the loan, would result in the same total interest paid as the combination of multiple loans with different interest rates and amounts.

2. How is the equivalent loan rate calculated?

The equivalent loan rate is calculated using a formula that takes into account the amount, interest rate, and term of each individual loan. This formula is often referred to as the "weighted average interest rate" formula.

3. Why is it important to calculate the equivalent loan rate?

Calculating the equivalent loan rate allows borrowers to compare different loan options and determine which option would result in the lowest overall interest paid. It also helps borrowers understand the true cost of their loans and make more informed financial decisions.

4. Can the equivalent loan rate change over time?

Yes, the equivalent loan rate can change over time if the interest rates or terms of the individual loans change. For example, if one of the loans in the combination has a variable interest rate, the equivalent loan rate will also change whenever that interest rate changes.

5. How can I use the equivalent loan rate to save money on my loans?

By calculating the equivalent loan rate, you can identify which loans have higher interest rates and prioritize paying them off first. This can potentially save you money in the long run by reducing the total amount of interest paid on your loans.

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