Variable Rate

Variable Rate Meaning:
In deposit terminology, the term Variable Rate refers to any type of deposit account which does not pay its holder a fixed interest rate. The level of the Variable Rate paid is often based on a benchmark interest rate such as the prime rate in the United States or another money market index like LIBOR.

Variable Rate Example:
For example, the Variable Rate of interest paid on a deposit account will often be tied to another benchmark interest rate such as the prime rate in the United States. If the prime rate is at 3.25% and a bank customer is making a Variable Rate deposit of $100,000 at two percentage points below the prime rate, this would mean that they would receive an effective interest rate of 1.25% on the deposit while the prime rate remained at 3.25%. If the prime rate then rose to 4% after 6 months, the bank customer would then receive 2% on the same loan. Also, if in the second year of the Variable Rate deposit, the Prime Rate fell to 3.75%, this would reduce the Variable Rate of interest on the deposit to 1.75%.