Definition of Variable Interest Rate

Variable rate financing is where the interest rate on a loan can change, based on the prime rate or another rate called an “index.”

Explanation of Variable Interest Rate

With a variable rate loan, the interest rate on the loan changes as the index rate changes, meaning that it could go up or down. Because interest rate can go up, monthly payment can also go up. The longer the term of the loan, the more risky a variable rate loan can be for a borrower, because there is more time for rates to increase.