What is a Variable Interest Rate?
A variable interest rate is an interest rate that can change from time to time.
How Does a Variable Interest Rate Work?
For example, let's say that you want to borrow $5,000 to start a business. Company XYZ offeres you a variable interest rate loan at plus 5%. That means that the interest rate on the loan equals whatever the prime rate is, plus 5%. So if the prime rate is 4%, then your loan carries an interest rate of 9%. The bank may "reset" the rate from time to time as the prime rate changes. This means that if the prime rate goes up, your rate goes up; if the prime rate goes down, your rate goes down. This helps the bank avoid losing if the prime rate happens to go up after it has granted you the loan. It also helps you avoid overpaying for the loan if prime rates happen to go down after you take out the loan.
In another example, if your mortgage).interest rate is a variable rate (that is, it is adjustable), your rate rises and falls with the and you and your payments get to go along for the ride. This is great when rates are falling, but when rates are rising, hang on (or try to refinance into a fixed-rate
Why Does a Variable Interest Rate Matter?
It's important to remember that interest rates don't just change by themselves. There's usually a trigger, such as economic information about consumer spending or business inventories. And given that the nation's thousands of banks each make their own determinations about what they're willing to pay for loans, there is no one person or entity that "sets" interest rates. For example, the is essentially the result of a survey of what a couple dozen banks charge their best customers. The London Interbank Offered Rate (LIBOR) operates on the same philosophy (though the calculations are different). In any case, interest rates are really a matter of supply and demand.and charge for
Interest rates are some of the most powerful and influential components of any nest egg., which is why most countries' central banks take a keen interest if not an active role in monitoring interest rates. They also affect individual, day-to-day consumer decisions, such as determining whether it's a good time to buy a house, borrow for a college degree or in the bank. After all, the higher interest rates are, the less borrowing (and thus economic expansion) takes place; the lower interest rates go, the more borrowing (and economic expansion) takes place. They affect prices, trading, markets and the size of every investor's future
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Every three months a fresh earnings season comes around to challenge investors. They worry...Read More →
Back in the late 1990s, little old ladies became stock-picking experts. The local mailman was just as comfortable recommending Lucent and AOL as he was talking about the weekend forecast. ...Read More →
Saving money? That’s amazing, but you might be wondering what’s the best account to store your savings. Below we break down your options by looking at money market accounts vs savings accounts so...Read More →
If you're a parent, here's a question that has probably crossed your mind: How do I teach my kids about money...Read More →
When you look at your list of daily tasks and appointments, what jumps out? The presentation that you have to prepare? That hot stock you want to buy? The trip that you...Read More →