Variable Rate Loan
What does it mean
A Variable Rate Loan refers to a note where the interest rate will change at pre-defined times during the life of the loan as long as payments are made as prescribed in the note. Please note the frequency of changes or amount of the change are part of the negotiations with the borrower.
Why does it matter
A Variable Rate loan is a common tool of a banker. In a Variable Rate Loan, a portion of the Interest Rate Risk is shifted from the bank to the customer. The degree of how much this risk is shifted will depend on how often or quickly changes in market rates result in a change to the customer’s loan rate. Variable Rate products give the banker an extreme amount of customization to negotiate around, but understanding the impact to both the customer and borrower will be essential.
Other Relevant Terms
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