amount of compensation to a lender that is allowed to vary over the maturity of a loan. The amount of variation is generally governed by an appropriate index.
interest rate on a loan that rises and falls based on the movement of an underlying index of interest rates. For example, many credit cards charge variable interest rates, based on a specific spread over the prime rate. Most home equity loans charge variable rates tied to the prime rate. Also called adjustable interest rate.
an amount of compensation to a lender that is allowed to vary over the maturity of a loan. The amount of variation is generally governed by an appropriate index.
Example: A 20-year loan is made with a variable interest rate. The initial rate is 10% but may be changed each year in relation to changes in a published index of average loan rates. If, at the end of the first year, the index has risen one percentage point, the rate on the loan may be raised to 11%. Similarly, a fall in the index at one point would allow a decrease in the loan rate to 9%.
