Adjustable interest rate - Financial definition

In finance, an adjustable interest rate, also known as a variable rate, is a lending or borrowing rate that is subject to periodic adjustments according to specified criteria. These criteria can include changes in prevailing market interest rates, such as the prime rate, or other benchmark rates like LIBOR (London Interbank Offered Rate). Adjustable interest rates are commonly found in mortgages, where they offer borrowers initial lower rates that may increase or decrease over time based on changes in the underlying index.

This flexibility can be beneficial for both lenders and borrowers, allowing lenders to adjust their rates to reflect changes in their cost of funds and borrowers to potentially benefit from lower rates in falling interest rate environments. However, adjustable rates also carry the risk of higher payments if interest rates rise, making them a key consideration for borrowers in assessing their long-term financial obligations.