Floating interest rate

<h2 id="floating-rate-loan">Floating rate loan</h2>
<p>In business and  finance, a <i>floating rate loan</i> (or a variable or adjustable rate loan) refers to a loan with a floating interest rate. The total rate paid by the customer varies, or "floats", in relation to some base rate. The <a href="/facts/Maturity_(finance)/zbEuul9J">term</a> of the loan may be substantially longer than the basis from which the floating rate loan is priced; for example, a 25-year mortgage may be priced off the 6-month <a href="/facts/Prime_lending_rate/IllnsWPz">prime lending rate</a>.
</p><p>Floating rate loans are common in the banking industry and for large corporate customers.<a class="footnote-ref" id="fnref:5" href="#fn:5"><sup>5</sup></a><a class="footnote-ref" id="fnref:6" href="#fn:6"><sup>6</sup></a> A <a href="/facts/Adjustable_rate_mortgage/4K9XSu7J">floating rate mortgage</a> is a mortgage with a floating rate, as opposed to a <a href="/facts/Fixed_interest/1q0A0oWX">fixed rate loan</a>.<a class="footnote-ref" id="fnref:7" href="#fn:7"><sup>7</sup></a> 
</p><p>In many countries, floating rate loans and mortgages are predominant. They may be referred to by different names, such as an <a href="/facts/Adjustable_rate_mortgage/4K9XSu7J">adjustable rate mortgage</a> in the <a href="/facts/United_States/P0sCdLe5">United States</a>. In some countries, there may be no special name for this type of loan or mortgage, as floating rate lending may be the norm. For example, in Canada substantially all mortgages are floating rate mortgages; borrowers may choose to "fix" the interest rate for any period between six months and ten years, although the actual term of the loan may be 25 years or more.
</p><p>Floating rate loans are sometimes referred to as <a href="/facts/Bullet_loan/VjqG9496">bullet loans</a>, although they are distinct concepts. In a bullet loan, a large payment (the "bullet" or "balloon") is payable at the end of the loan, as opposed to a capital and interest loan, where the payment pattern incorporates level payments throughout the loan, each containing an element of capital, and no bullet payment at the end. A floating rate loan therefore may or may not incorporate a bullet payment.
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<h2 id="example">Example</h2>
<p>A customer borrows $25,000 from a bank; the terms of the loan are (six-month) <a href="/facts/SOFR/dhVnbMTv">SOFR</a> + 3.5%. At the time of issuing the loan, the <a href="/facts/SOFR/dhVnbMTv">SOFR</a> rate is 2.5%. For the first six months, the borrower pays the bank 6% annual interest: in this simplified case $750 for six months. At the end of the first six months, the SOFR rate has risen to 4%; the client will pay 7.5% (or $937.5) for the second half of the year. At the beginning of the second year, the SOFR rate has now fallen to 1.5%, and the borrowing costs are $500 for the following six months.
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<h2 id="see-also">See also</h2>
<ul><li><a href="/facts/Fixed_interest/1q0A0oWX">Fixed interest</a></li></ul>

<h2 id="references">References</h2>

<ol>
<li id="fn:1"><p>"A Guide to Understanding Floating-Rate Securities". Raymond James Financial. Retrieved 16 February 2015. <a href="http://www.raymondjames.com/fixed_income_floating_rate.htm" target="_blank">http://www.raymondjames.com/fixed_income_floating_rate.htm</a> <a href="#fnref:1" class="footnote-back-ref">↩</a></p></li>
<li id="fn:2"><p>"A Guide to Understanding Floating-Rate Securities". Raymond James Financial. Retrieved 16 February 2015. <a href="http://www.raymondjames.com/fixed_income_floating_rate.htm" target="_blank">http://www.raymondjames.com/fixed_income_floating_rate.htm</a> <a href="#fnref:2" class="footnote-back-ref">↩</a></p></li>
<li id="fn:3"><p>Zibel, Alan (30 September 2008). "Q&A: What is Libor, and how does it affect you?". The Seattle Times. Retrieved 16 February 2015. <a href="http://seattletimes.com/html/businesstechnology/2008215959_weblibor30.html" target="_blank">http://seattletimes.com/html/businesstechnology/2008215959_weblibor30.html</a> <a href="#fnref:3" class="footnote-back-ref">↩</a></p></li>
<li id="fn:4"><p>Hoffmann, Peter; Langfield, Sam; Pierobon, Federico; Vuillemey, Guillaume (31 August 2019). "Who Bears Interest Rate Risk?". Review of Financial Studies. {{cite journal}}: Cite journal requires |journal= (help) <a href="https://academic.oup.com/rfs/article/32/8/2921/5215152" target="_blank">https://academic.oup.com/rfs/article/32/8/2921/5215152</a> <a href="#fnref:4" class="footnote-back-ref">↩</a></p></li>
<li id="fn:5"><p>Schrimpf, Andreas; Sushko, Vladyslav (31 March 2019). "Beyond LIBOR: a primer on the new reference rates" (PDF). BIS Quarterly Review. Retrieved 23 November 2022. <a href="https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf" target="_blank">https://www.bis.org/publ/qtrpdf/r_qt1903e.pdf</a> <a href="#fnref:5" class="footnote-back-ref">↩</a></p></li>
<li id="fn:6"><p>Nesbitt, Stephen (30 June 2022). "Private Debt: Weathering Rising Interest Rates". Cliffwater. Retrieved 23 November 2022. <a href="https://www.cliffwaterfunds.com/floatingrateloans" target="_blank">https://www.cliffwaterfunds.com/floatingrateloans</a> <a href="#fnref:6" class="footnote-back-ref">↩</a></p></li>
<li id="fn:7"><p>Merrefield, Clark (9 November 2022). "Adjustable-rate mortgages: A research-based explainer". The Journalist’s Resource. Retrieved 23 November 2022. <a href="https://journalistsresource.org/economics/adjustable-rate-mortgages-explainer" target="_blank">https://journalistsresource.org/economics/adjustable-rate-mortgages-explainer</a> <a href="#fnref:7" class="footnote-back-ref">↩</a></p></li>
</ol>

Floating interest rate open-in-new

Floating interest rate