Calculate a weighted cost of funds across three sources, solve a source rate for a target blend, or derive the rate from annual interest expense.

USD balances and annual percentage rates on the same basis. Constant-balance, simple annual allocation; excludes fees, repayments, compounding and equity cost.

Cost of Funds Formula

The calculator above uses weighted annual rate = sum(balance × annual rate) / total balance, or annual interest expense / average interest-bearing liabilities × 100. It can also solve source 3’s rate for a target blend. The separate simple-interest relationship below estimates dollar interest over a term, assuming no compounding or principal repayments; this calculator has no amortization tab.

COF = B × IR / 100 × T
  • Where COF is the cost of funds ($), interpreted here as total interest paid under the simple-interest assumption
  • B is the borrowed amount of funds ($)
  • IR is the interest rate (%) for the same time basis as T (for example, an annual rate when T is in years)
  • T is the total amount of time the funds are borrowed (for example, years when using an annual interest rate)

To calculate the simple-interest cost of funds, multiply the borrowed amount by the interest rate (as a decimal), then multiply by the time period.

Cost of Funds Definition

What is cost of funds?

Cost of funds generally refers to the cost of raising or borrowing money. In many business-borrowing contexts, it is often approximated as the interest expense (and sometimes fees) associated with a loan. In banking and finance, the term is also commonly used to describe the weighted-average rate a financial institution pays to obtain funding (such as deposits and wholesale borrowing).

In this page’s calculator, the main output is an annual funding rate. The weighted modes also show annual dollar funding cost at constant balances. The expense mode specifically uses average interest-bearing liabilities; measures using total funding or earning assets have different denominators.

Example Problem

How to calculate cost of funds?

The following separate illustration uses the simple-interest equation for a business project. It does not model amortizing payments or a blended funding mix.

First, find out how much money needs to be borrowed in order to fund the project. For this example, we are looking at a renovation project to the office building that will cost $50,000.00.

Next, determine the interest rate of the borrowed money. After shopping around offers, this company is able to find an interest rate as low as 3.5% per year.

Next, determine the total repayment time on the borrowed funds. The 3.5% loan must be paid off in 5 years in this case.

Finally, calculate the cost of funds using the formula above (simple interest):

COF = B * IR/100 * T

COF = $50,000 * 3.5/100 * 5

COF = $8,750.00