The variable interest rate (VIR) is a type of interest rate that is subject to change over time according to the economic market environment. A VIR is typically associated with adjustable-rate loans and home mortgages; however, financial lenders may use variable interest rate for other loan types as well. With a variable interest rate loan, borrowers generally enjoy the potential of lower interest payments when the economy is weak and rates are low, as well as the security of potentially higher payments when the economy makes a turnaround. To better understand the potential benefits of a VIR, a distinction between fixed interest rates and variable interest rates must be made.

Alternatively, a fixed interest rate is a predetermined rate of interest set by the lender that remains consistent over the life of the loan. The security of a fixed interest rate loan may be attractive to some borrowers who are uncertain of the future economic environment, however, what is given in security may be lost in value. This is especially true if the market offers lower interest payment opportunities in the future, in which case a borrower with a fixed rate loan could potentially be paying more than necessary.

With a variable interest rate loan, the borrower generally must face additional risks, however, the potential for a shorter loan period and lower interest payments can be beneficial. The most common type of variable interest rate is the Adjustable Rate Mortgage, or ARM. An ARM is generally offered with an introductory rate that is lower than the regular variable interest rate and this rate stays in effect for a predetermined period of time before it adjusts to keep pace with changing market conditions. With an ARM, an initial lower interest rate may provide the borrower with an opportunity to pay off their loan quicker, which could result in substantial long-term savings. Similarly, borrowers may elect to keep their loan for the initial period provided by the lender and then negotiate a new interest rate to stay current with the current market value.

In some cases, a variable interest rate loan may also provide an opportunity to convert the loan to a fixed interest rate in cases where the borrower may feel more confident about the future economic conditions. It is always important to have knowledge of the different loan types available, as well as the associated risks and benefits each provide. Borrowers who take the time to understand all their options, including VIRs, are more likely to make informed decisions on their borrowing strategy. Having the right to explore new loan options over time can be beneficial for many borrowers and can lead to long-term savings in the end.