Calculating the Average Interest Rate of Multiple Loans

When managing multiple loans with different interest rates, it can be challenging to determine the average interest rate for all loans combined. This article aims to provide a clear and straightforward method of calculating the average interest rate for two loans with different principal amounts and interest rates. We will consider a scenario where one loan is for Rs. 200,000 with an interest rate of 5% per annum, and the second loan is for Rs. 300,000 with an interest rate of 4% per annum. We will demonstrate how to calculate the monthly interest, the total interest for both loans, and the average interest rate on the combined principal amount.

Understanding the Monthly Interest Calculation

To calculate the monthly interest for each loan, we need to understand that interest is calculated based on the principal amount and the interest rate. In this example, let's look at the monthly interest for both loans.

Loan 1: Principal amount is Rs. 200,000 with an interest rate of 5% per annum.
The monthly interest for the first loan can be calculated as:
(200,000 * 5 / 100) / 12 10000 / 12 833.33 (monthly interest). Loan 2: Principal amount is Rs. 300,000 with an interest rate of 4% per annum.
The monthly interest for the second loan can be calculated as:
(300,000 * 4 / 100) / 12 12000 / 12 1000 (monthly interest).

Therefore, the total monthly interest for both loans combined is 10000 12000 22000 Rs.

Calculating the Average Interest Rate

After calculating the total monthly interest for both loans, we can determine the average interest rate by dividing the total monthly interest by the combined principal amount.

The combined principal amount is Rs. 200,000 300,000 500,000. The total monthly interest for both loans is 22,000.

The average interest rate can be calculated as:
(22000 / 500000) * 100 4.4%

Conclusion

By following this method, you can accurately calculate the average interest rate for multiple loans. Understanding the monthly interest, the total interest for both loans, and the average interest rate is crucial for effective financial management. If you need more assistance with loan management or any other financial calculations, consider seeking professional advice from a financial advisor.

Reference: Financial Management, Loan Interest Calculation