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It is lost in heating the resistive material of the rheostat.

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Q: Where does lost energy in a rheostat go?
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Where does energy go when it is transferred?

It is lost as heat.


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How a rheostat is used is as a potential divider?

_____________ J| -_____/\/\/\/\_________+ | | | - + | |___i|i|___| E Well this is the circuit diagram , where r is the sliding jockey of the rheostat and a cell (E) is connected in parallel with the rheostat. By adjusting the jockey resistance of the rheostat can be altered which in turn would regulate the potential offered by the cell E to the main circuit. And thus a rheostat can be used as a potential divider.