Learn what a variable-rate loan is, how index-plus-margin pricing works,
A variable-rate loan is a loan whose interest rate can change over time instead of staying fixed for the full term. The reset usually follows a reference rate plus a contract margin.
A variable-rate mortgage, credit line, or other loan may start with a teaser or introductory rate and then reset at stated intervals. When the reference index moves, the borrower’s rate and payment path can move with it, subject to any caps, floors, or periodic adjustment rules in the contract.
This matters because variable-rate borrowing changes the distribution of risk between borrower and lender. Borrowers may start with lower rates than on fixed-rate loans, but they also face payment uncertainty if market rates rise or remain elevated.