Variable Interest Rate

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rjonesx
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What is a ‘Variable Interest Rate’

A variable interest rate is an interest rate on a loan or security that fluctuates over time, because it is based on an underlying benchmark interest rate or index that changes periodically. The obvious advantage of a variable interest rate is that if the underlying interest rate or index declines, the borrower’s interest payments also fall. Conversely, if the underlying index rises, interest payments increase.

Variable Interest Rate Credit Cards

Variable interest rate credit cards have an annual percentage rate (APR) tied to a particular index, such as the prime rate. The prime rate most commonly changes when the Federal Reserve adjusts the federal funds rate, resulting in a change in the rate of the associated credit card. The rates on variable interest rate credit cards can change without advance notice to the cardholder.

Variable Interest Rate Loans and Mortgages

Variable interest rate loans function similarly to credit cards except for the payment schedule. While a credit card is considered a revolving line of credit, most loans are installment loans, with a specified number of payments, leading to the loan being paid off by a particular date. As interest rates vary, the required payment will go up or down according to the change in rate and the number of payments remaining before completion.

Variable Interest Rate Bonds

For variable interest rate bonds, the benchmark rate may be the London Interbank Offered Rate  (LIBOR). Some variable rate bonds also use the five-year, 10-year or 30-year U.S. Treasury bond yield as the benchmark interest rate, offering a coupon rate that is set at a certain spread above the yield on U.S. Treasuries.

‘Variable Interest Rate’

Further Reading

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