Definition
A variable rate is an interest calculation that may fluctuate based on other factors.
Analysis
A variable rate is a feature found on certain credit card products as well as on adjustable rate mortgages (ARMs).
On credit cards that feature a variable rate, the interest rate is frequently pegged to prime rate. Some products, for example, may calculate a variable rate by adding 5 percentage points to the current prime rate. A prime rate of 6.9% would yield an interest rate of 11.9% in this example. As prime rate fluctuates, then so does the interest rate and resulting finance charges on the account.
ARMs may base their variable rates on market rates. As these rates fluctuate, the interest rates on ARMs may fluctuate accordingly. There are often restrictions, however on how many percentage points an ARM may increase over a certain period of time.
Variable rates have greater uncertainty and are riskier to the borrower than fixed rates.
