Business, Legal & Accounting Glossary
An interest rate that moves up and down in line with the base rate. When interest rates fall, there will often be a delay between when the base rate moves and when a bank’s variable interest rate moves, allowing the bank to earn more profits. They also might not pass on the full amount of the movement. The base rate might fall 0.25% but only 0.15% is passed onto customers.
A variable interest rate is one that fluctuates over time, usually in relation to an underlying benchmark, such as the prime rate. As a result, if the underlying benchmark falls, a borrower is charged a lower interest rate, and vice versa if the benchmark rises. Credit card debt and other forms of short-term debt are frequently subject to variable interest rates.
adjustable rate
floating rate
In order to attract borrowers, lenders typically set the initial interest rate on a variable rate loan quite low. When the expected repayment period is short, this can work out quite well for the borrower because the loan will not be outstanding long enough for many rate increases to be applied to it.
Variable interest rates can be dangerous for a highly leveraged company because a rise in the underlying benchmark can make it difficult for the company to make scheduled interest payments. They are especially concerning when applied to mortgages, because a borrower is at risk of a significant rate increase over the loan’s multi-year term.
To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.
Definitions for Variable Interest Rate are sourced/syndicated and enhanced from:
This glossary post was last updated: 13th April, 2022 | 0 Views.