Variable Interest Rate

DEFINITION of 'Variable Interest Rate'

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.

BREAKING DOWN 'Variable Interest Rate'

The underlying benchmark interest rate or index for a variable interest rate depends on the type of loan or security. Variable interest rates for mortgages, automobiles and credit cards may be based on a benchmark rate such as the prime rate in a country. Banks and financial institutions charge consumers a spread over this benchmark rate, with the spread depending on a number of factors such as the type of asset and the consumer's credit rating.

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.

RELATED TERMS
  1. Bond

    A debt investment in which an investor loans money to an entity ...
  2. Mortgage

    A debt instrument, secured by the collateral of specified real ...
  3. Gross Interest

    The annual rate of interest to be paid on an investment, security ...
  4. Interest Rate Ceiling

    The maximum interest rate that a financial institution can charge ...
  5. Interest Rate

    The amount charged, expressed as a percentage of principal, by ...
  6. Fixed Interest Rate

    An interest rate on a liability, such as a loan or mortgage, ...
Related Articles
  1. Executive Compensation

    Treasurer: Job Description & Average Salary

    Discover more about the responsibilities of a treasurer and the skills needed for this position, as well as the average annual salary of a treasurer.
  2. Retirement

    Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.
  3. Investing Basics

    How Interest Rates Affect The Stock Market

    Whether you're buying lunch, a home or a stock, you're influenced by interest rates.
  4. Entrepreneurship

    Small Business Loan Vs Line of Credit: How They Differ

    Understand the differences between a small business loan and a line of credit, and learn some of the most appropriate uses for each form of financing.
  5. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
  6. Investing Basics

    Interest Rates And Your Bond Investments

    By understanding the factors that influence interest rates, you can learn to anticipate their movement and profit from it.
  7. Options & Futures

    Home-Equity Loans: The Costs

    Learn the factors to consider when comparing the different programs offered by various lenders.
  8. Investing Basics

    Subprime Lending: Helping Hand Or Underhanded?

    These loans can spell disaster for borrowers, but that doesn't mean they should be condemned.
  9. Mutual Funds & ETFs

    3 PIMCO Funds Rated 5 Stars by Morningstar

    Learn about three fixed income mutual funds managed by Pacific Investment Management Company (PIMCO) that have received five-star overall ratings from Morningstar.
  10. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
RELATED FAQS
  1. What exactly is the Wall Street Journal prime rate?

    As globalization continues to force businesses to streamline their operations to ensure their long-term competitive positions, ... Read Full Answer >>
  2. What are some signs my credit card's annual fee is too high?

    A person with good credit has no reason to pay any annual credit card fee. However, it may be worthwhile even to a person ... Read Full Answer >>
  3. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Full Answer >>
  4. What is comparative advantage?

    Comparative advantage is an economic law that demonstrates the ways in which protectionism (mercantilism, at the time it ... Read Full Answer >>
  5. How does the Wall Street Journal prime rate forecast work?

    The prime rate forecast is also known as the consensus prime rate, or the average prime rate defined by the Wall Street Journal ... Read Full Answer >>
  6. What's the difference between microeconomics and macroeconomics?

    Microeconomics is generally the study of individuals and business decisions, macroeconomics looks at higher up country and ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center