The Different Faces of the Variable Interest Rate

Variable Interest Rates - MortgagesWhat is a variable interest rate?

A variable interest rate is just what it sounds like: an interest rate that varies over time. It’s the opposite of a fixed interest rate, which remains the same over time. Variable interest rates are generally used by financial institutions to move the rates on their products up and down as the market conditions change.

Since the financial institutions are bound by the government and other factors to do business at a certain rate, they have to be able to adjust to those changes with the products they provide to consumers.

From a consumer perspective, variable interest rates aren’t inherently bad. They are just more risky. With a variable interest rate product, you take a risk that the rate will change so much that the financial product is no longer a good option for you. Or worse, you can no longer afford to use the financial product.

Types of Debt with Variable Interest Rates

Theoretically, any type of debt could have a variable interest rate. But here are some of the more common debts with variable rates and a little bit about how they work.

Mortgages and Home Equity Lines of Credit – If you visit my mortgage rates table right now you will quickly see the difference between variable mortgages and fixed mortgages. You can get a fixed rate mortgage for around 4.5% right now.

A variable (adjustable) rate mortgage will run you only 3.5%. How can the lender afford such a difference? Well, in 5 years, that 3.5% could be jacked up to 10%, based on market conditions. And the fixed mortgage will still be rocking along at 4.5%.

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Credit Cards – Most credit cards are issued with a variable interest rate. The rates adjust typically based on the Prime lending rate. The recent CARD Act legislation changed the way credit card companies could increase interest rates.

To increase rates, they need to now give you 45 days notice. However, if the card has a variable interest rate then they can still change that at anytime without notice, based on the Prime rate (or based on whatever index they choose). Thus, more card companies are now issuing variable rate cards.

A quick look at my zero percent intro rate cards, and you will see (variable) by almost every one. Of course, if you use your card responsibly and pay it off in full each month then none of this is an issue for you.

Student Loans – Finally, federal student loans are mostly set at fixed rates these days. However, private student loans can still have variable interest rates. Likewise, if you have several federal student loans and consolidate them, be sure you understand the consolidation loan and if it will be variable. Suze Orman recommends using a HELOC to get rid of variable interest rate private student loans.

Saving Accounts Have Variable Interest Rates

On the flip side of the equation we have savings accounts, which pay out a variable rate of interest on the money you have in the account.

As we’ve seen over the past three years, savings account interest rates can, and do, change. Unfortunately, the factors which influence those rates are at all time lows. Therefore, banks can’t afford to pay more than 1-2% these days. Here’s a quote from FNBO Direct about their rate changes:

“Our rate is typically determined based on market conditions such as, but not bound by, the Federal Funds rate, LIBOR [London Interbank Offered Rate], our competitors’ rates and other factors. We strive to maintain a competitive rate and evaluate pricing often.”

Variable Rate Annuities

Another variable product that’s not a debt are annuities. Annuities are an insurance product that provide a guaranteed payment in retirement once the balance has been paid. Variable annuities have a variable element to them.

Some of the balance is invested in growth stocks, and therefore, the return is going to be based on the market. Since the stock market is variable, a portion of the annuity is then variable. So while it isn’t exactly a variable interest rate, it acts like a variable rate of return.

Annuities come in many different forms, and are defined 10 different ways by 10 different companies. Do your research if you want to use a variable annuity.

Hopefully this has been an enlightening run down of some of the variable interest rate basics. How have variable interest rates impacted your life? Are you using a variable rate to your advantage right now? Did you use one in the past to your detriment?

photo by woodleywonderworks

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About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon. He created this website back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence. He uses Personal Capital to track his wealth. All the content on this blog is original and created or edited by PT.


  1. Budgeting Money says

    what’s the interest rate for Student Loans ?