a variable interest rate is an interest
rate which changes over time and does not remain constant is an interest rate
which is tied to another market interest rate nowadays LIBOR has become the
industry standard that is used for most positions a variable interest rate is
adjusted periodically and thus is not likely to remain the same throughout a
loans life increase or decrease depending on the
development of LIBOR usually variable interest rates include
a LIBOR rate plus spread the spread is determined by the criteria
that we saw before inflation default risk liquidity and maturity a fixed
interest rate on the other hand remains constant throughout the entire duration
of a loan even if the market conditions change the fixed interest rate does not
change the payments for a loan can be equal through the entire duration
fixed rates are typically used for loans that have a duration of ten or more
years most people prefer fixed interest rates because they are averse to risk
but it is not necessarily the right choice first of all it really depends whether
the current level of interest rates is low compared to at least 20 years of
historical sample if that’s the case it can be beneficial to lock in a fixed
rate but if it isn’t true a variable rate is a very viable alternative
furthermore fixed rates includes some of the additional costs for carrying out
transactions with derivative financial instruments swaps which allow banks to
fix the interest rate historically some academic studies show
that variable rates tend to be less costly for borrowers in the long run you