Consumer installment loan or commercial loan carrying an interest rate that fluctuates according to changes in an Index rate. A variable rate loan is also called a floating rate loan. The rate paid by the borrower may rise or fall, depending on changes in Money Market rates such as the six-month Treasury bill, or the bank Prime Rate. Most adjustable rate consumer loans are level payment loans, and rates are revised quarterly or semiannually. If the loan rate falls, the installment Note is paid early; if rates rise, there is an additional Balloon Payment. Variable rate consumer loans generally are medium-term loans used in automobile financing, home improvement, home equity lines of credit, or unsecured personal loans.
Variable rate commercial loans are adjusted against changes in a Base Rate for example, the banker's acceptance rate or the London Interbank Offered Rate (LIBOR). The base lending rate is typically a money market rate, determined by the buyers and sellers of excess funds in the short-term credit markets. See also Adjustable Rate Mortgage.
