Variable Interest Rate

Variable interest rate summary:

• A variable interest rate is a rate that can fluctuate over time.

• Variable rates can be found on virtually any kind of credit account. They’re commonly associated with adjustable-rate mortgages (ARMs), credit cards, and most HELOCs.

• Variable rates can be unpredictable, making it harder to budget.

Variable interest rate definition and meaning

Variable interest rates are interest rates that can (and usually do) fluctuate over time. They change based on a benchmark rate. 

A benchmark rate is an interest rate that financial institutions follow. The benchmark could be the prime rate, the Federal Funds rate, or another rate. The terms and conditions on your account or loan agreement will tell you what rate your lender follows. When the benchmark rate changes, the rate on your account could change. Variable rates could go up or down.

Most credit cards have variable rates, and so do many HELOCs.

Key concept: A variable interest rate is a rate that can increase or decrease periodically based on the benchmark rate your lender follows.

More about variable interest rates

There are three essential factors to keep in mind:

1. Variable rates are tied to a benchmark interest rate or index, such as the prime rate. The prime rate is the rate the bank charges its most creditworthy customers. It’s a common benchmark for other lending rates. Each bank sets its own prime rate.

2. Variable rates may be adjusted periodically. Variable interest rates could change at predetermined intervals. 

3. Variable rates can rise or fall. Since you don't know what will happen when you take out a loan with a variable rate, it's a good idea to plan for what you'll do if the rate rises. 

Most credit cards have a variable interest rate. Typically, credit card variable rates are tied to the prime rate. The prime rate is a bank’s lowest interest rate, generally reserved for large corporations and high-net-worth people. When the prime rate increases, you can expect the variable rate on that bank’s credit cards to also increase. 

Home equity lines of credit (HELOCs) are typically associated with variable interest rates, just like credit cards. Some HELOCs offer a combination of variable and fixed rates. For example, the interest rate is variable, but each time you borrow money during the draw period, you get the current fixed rate on that portion of your balance.

The Achieve HELOC offers a fixed interest rate from day one. It’s not confusing, and you’re protected from rate increases. 

Variable interest rate: a comprehensive breakdown

Variable rates have a few benefits, including:

• An adjustable-rate mortgage sometimes comes with a lower initial interest rate compared to a similar fixed-rate loan. 

• Any time your variable rate decreases, your loan cost goes down. 

Variable rate disadvantages include:

• You're never sure what'll happen to your loan costs in the long term.

• Budgeting could be a challenge if your payments increase because your rate went up.

• You might pay more over the life of a loan than you thought you would if rates rise.