What Is a Variable Rate? | Business Lending Glossary

Definition

An interest rate that fluctuates over the life of a loan based on changes in a benchmark index such as the Prime Rate or SOFR.

Explanation

Variable-rate loans typically start lower than comparable fixed-rate products but expose borrowers to rate risk — if the benchmark rises, so do payments. Lenders usually set the rate as a spread above the benchmark (e.g., Prime + 2.5%). Rate adjustments may occur monthly, quarterly, or annually depending on the loan agreement.

Example

A business line of credit is priced at Prime + 3%. When the Prime Rate moves from 7.5% to 8.5%, the line's rate increases from 10.5% to 11.5%, raising monthly interest charges on any outstanding balance.

Why It Matters

Variable rates can significantly increase your cost of borrowing during rising-rate environments, so businesses using variable-rate facilities should model a rate-increase scenario before committing.

Frequently asked questions

Can I convert a variable-rate loan to fixed?

Some lenders offer rate-lock options or refinancing into a fixed-rate product, though this typically involves new underwriting, closing costs, and potentially a higher starting rate than your current variable rate.