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CandleFocus Glossary Editor
A variable interest rate is an interest rate that can change as market conditions change. This type of interest rate is also known as an adjustable rate, as it adjusts itself depending on fluctuations in a benchmark interest rate or index. Variable interest rates are most commonly featured in mortgages, credit cards, corporate bonds, derivatives, and other loan or security products.
Variable interest rates are attractive to borrowers because they offer the potential to save money if the underlying benchmark rate drops during the lifetime of the loan. Compared to fixed rate products that come with the same interest rate throughout the lifetime of the loan, borrowers can benefit from a lower interest rate if the underlying benchmark rate drops. In an environment of decreasing interest rates, this could result in a considerable amount of savings for borrowers.
On the other hand, there is also the potential for interest rate increases. If the benchmark rate rises, the cost of the loan also increases. As a result, borrowers should know that there is a risk they could end up paying more than they planned to. To help manage this risk, some lenders may provide a rate cap that limits how high the rate can rise.
For borrowers looking for a loan product with a fixed rate, a variable interest rate may not be the best solution. But for those willing to take the risk in exchange for potential savings, the variable interest rate could be an attractive option. Additionally, those who expect a decrease in the underlying rate should consider a variable interest rate product as that could allow them to benefit from any potential decrease in the benchmark rate.
No matter what type of loan product a borrower chooses, it is important that they do their research and make an informed decision. As with any loan, understanding the terms and conditions before signing any agreements is crucial. Additionally, it is beneficial to consider any potential rate changes that may occur and create a financial plan for both a decrease and an increase.
Variable interest rates are attractive to borrowers because they offer the potential to save money if the underlying benchmark rate drops during the lifetime of the loan. Compared to fixed rate products that come with the same interest rate throughout the lifetime of the loan, borrowers can benefit from a lower interest rate if the underlying benchmark rate drops. In an environment of decreasing interest rates, this could result in a considerable amount of savings for borrowers.
On the other hand, there is also the potential for interest rate increases. If the benchmark rate rises, the cost of the loan also increases. As a result, borrowers should know that there is a risk they could end up paying more than they planned to. To help manage this risk, some lenders may provide a rate cap that limits how high the rate can rise.
For borrowers looking for a loan product with a fixed rate, a variable interest rate may not be the best solution. But for those willing to take the risk in exchange for potential savings, the variable interest rate could be an attractive option. Additionally, those who expect a decrease in the underlying rate should consider a variable interest rate product as that could allow them to benefit from any potential decrease in the benchmark rate.
No matter what type of loan product a borrower chooses, it is important that they do their research and make an informed decision. As with any loan, understanding the terms and conditions before signing any agreements is crucial. Additionally, it is beneficial to consider any potential rate changes that may occur and create a financial plan for both a decrease and an increase.