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Variable rate, also known as adjustable rate or floating interest rate, refers to any type of debt payment that does not have a fixed rate of interest over the life of the debt. This type of debt typically uses an index or other base rate for determining the rate of interest over a pre-determined period of time. The variable rate will change on a periodic basis. This change is determined by the movement of an outside indicator or influence but is normally prevented from moving above or below certain levels.
An example of variable rate or adjustable rate is seen in typical mortgage loans. In this type of loan, the interest rate on the loaned amount is periodically adjusted based on the costs incurred by the lender who is borrowing on the credit markets. Credit cards also commonly use a variable rate to determine interest on payments. The variable rate represents a certain spread over the prime rate.
In some cases selected providers of certain service and products may offer a variable rate for payment of goods and services received. This type of variable payment plan is most often associated with such things as home energy use including natural gas and electricity. Because the costs of natural gas, coal, oil and other natural resources tends to fluctuate based on supply and demand, these consumer goods are appropriate for variable rate payment plans.
Energy costs account for a large portion of household operating expenses and understanding the benefits and liabilities of a variable payment plan. Many utility companies offer this payment option to accommodate customers for which it is appropriate. When establishing service, changing service or auditing monthly bills consumers should be aware of their current payment plan and determine whether a variable rate plan is suitable for their circumstance.
For example, under a variable rate payment plan for gas or electric service, customers pay a different rate for the amount of energy that they consume over a period of time based on market conditions. If the cost of fuel rises then those increased costs are passed along to the consumer under a variable rate plan. Likewise if fuel costs decrease the consumer benefits from the market fluctuation and pays less for the amount of energy consumed.
A fixed rate plan for unpredictable resources like energy is another option offered by many service providers. The fixed rate model differs from the variable rate model in that cost to consumers is not determined by market variations. In the case of energy service, a fixed rate means that you pay the same amount per unit used based on a pre-determined rate. This rate will not change over the length of the service agreement which allows consumers to anticipate energy costs with greater accuracy. The fixed rate option provides the security of knowing that bills will not increase based on rate, but will increase based on consumption. The disadvantage of a fixed rate payment plan is that consumers who are committed to this model do not reap benefits when energy costs dip below their pre-determined rate.
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