A
loan with an
interest rate that changes periodically. Generally speaking, a variable rate loan is linked to some major
benchmark rate; for example, the interest rate may be stated as "
LIBOR + 1%." The loan may or may not have a
cap on how much the interest rate can rise or fall, or on how often the interest rate may change. Very often, the initial interest rate for a variable-rate loan is lower than that for a
fixed-rate loan. This allows more people to qualify for a loan; however, this kind of loan can be
risky because the interest rate (and therefore the monthly payment) can rise unexpectedly. See also:
Adjustable-rate mortgage.