A loan whose interest rate payments change over the life of the loan. Typically, the variable interest rate is tied to a benchmark rate such as the prime rate (base rate) or fed rate. The variable interest rate is adjusted periodically (say every 3,6, or 12 months) according to changes in market rates. When borrowing for long periods of time (e.g., 10, 15, 20 years), a variable rate loan exposes a borrower to a greater degree of interest rate risk. To reduce this risk, borrowers often buy interest rate caps in an attempt to place a ceiling on interest payments.
This loan is also referred to as a floating loan (floating-rate loan) or an adjustable-rate loan.
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