An interest rate on a loan or instrument with a variable interest rate (also known as an “adjustable” or “floating” rate) changes over time because it is dependent on an index or benchmark interest rate that fluctuates frequently.
Fixed interest rates do not change over time, unlike variable interest rates. The obvious benefit of a variable interest rate is that the borrower’s interest payments will decrease if the underlying interest rate or index decreases. If the underlying index increases, on the other hand, interest payments climb.
An interest rate that fluctuates up and down with the market as a whole or with an index is known as a variable rate. Depending on the type of loan or instrument, the underlying standard interest rate or index for a flexible interest rate will vary. Still, it is frequently linked to either the federal funds rate or the London Inter-Bank Offered Rate (LIBOR).