Variable Interest Loans
A variable interest loan is a loan in which the rate of interest changes with the market interest rates. A variable interest is also called an adjustable interest rate loans or a floating interest rate loans because it fluctuates over time depending on the market situation. The advantage of having a variable interest rate is that when the interest rate declines, the borrowers’ interest payments also falls and also vice versa if the index rises the interest payments increase which can lead to the borrower paying more that what he bargained for.
How does variable interest loans work
A variable interest rate moves up and down with the rest of the market. The variable interest rates of mortgages, automobiles, a credit card can be based on the prime rate in a country. The banks and other financial institutions charge around this benchmark rate and the spread depending on the number of factors such as the type of asset and the credit score to somewhere around 2%
Variable interest rate credit card
Variable interest rate credit card has an annual percentage rate tied to a particular index, such as the prime rate. The prime rate is the most common change in the rate of the associated credit card. The variable interest rate credit cards can change without advance notice to the cardholder.
Variable interest rate loans and mortgages
Loan functioning in variable interest loan and mortgages are similar to credit cards except for the payment scheduled. Loans are paid in the form of instalment and over a specific period of time, as the interest rate varies the required payment will go up or down according to the changes in the rate and the number of payments remaining. When a mortgage has a variable interest rate, it is commonly referred to as an adjustable rate mortgage (ARM). The ARMs start low for the first few years and then adjust after the period has expired.
Variable Interest rate bonds and securities
London Interbank Offered Rate (LIBOR) is the benchmark rate for variable interest rate bonds. Some variable-rate bonds use the five years, ten years, or thirty year US Treasury bond yield as the benchmark interest rate.
Benefits of variable interest loans
- Adjustable interest rate on the mortgages adjusts with the interest rates in the marketplace, the payment falls as the interest rate falls and you can save money sometime.
- The bank may reward you with lower initial rate because the risk you take that interest rates will rise in the future.
- Beneficial for personal loans as you take up a loan for Christmas, if you feel like spending extra this year and variable loan will get you a guaranteed Christmas loan with lower interest rates.