Variable Rate

Full definition

A variable interest rate is tied to a benchmark rate that fluctuates with market conditions. The most common benchmark for consumer products in the United States is the Prime Rate (set at 3 points above the Federal Funds Rate) or SOFR (Secured Overnight Financing Rate, which replaced LIBOR). How variable rates work in personal loans: If a variable-rate personal loan has a rate of Prime + 5%, and Prime is 8.5%, your rate is 13.5%. If the Fed raises rates and Prime moves to 9%, your rate becomes 14%. Your monthly payment rises with the rate. Variable vs fixed for personal loans: Most personal loans in the current market are fixed-rate. Variable-rate personal loans do exist (notably from some credit unions and online lenders) but are less common than on credit cards or HELOCs. When offered, variable rates often start lower than fixed rates to compensate for the risk you take on. Rate caps: Variable-rate consumer loans sometimes include caps - a maximum amount the rate can rise per year (periodic cap) or over the life of the loan (lifetime cap). Review these caps carefully before accepting a variable-rate offer. When variable can make sense: If rates are high and expected to decline (as in a high-rate cycle turning toward cuts), a variable-rate loan could drop your rate over time. If you plan to pay off the loan quickly (under 12 months), short-term rate volatility matters less. The risk: Unlike a fixed payment that you can budget around reliably, variable payments are unpredictable. A multi-year personal loan with a variable rate exposes you to significant payment increases if market rates rise substantially.

• Fixed interest rate
• Index Rate
• Prime rate