Adjustable Rate
An adjustable rate is referring to a specific type of interest rate.
Interest rate comparisons are common for most people seeking business funding or any type of traditional financing. This is because interest rates will make a big difference in payment amounts and the overall costs for loans. Interest rates are typically based on the prime rate set by the Federal Reserve.
There are two primary types of interest rates: fixed rate and adjustable rate.
Fixed rates are just what they say: fixed. The interest rate is set at the time of inception and will remain the same for the life of the loan or financing.
Adjustable rates are also set at the time of inception. However, with an adjustable rate, both parties typically agree to a slightly lower starting rate, knowing that this rate will later “adjust” to a fixed percentage over the prime rate.
A common scenario might be that the terms of a loan call for interest payments that are calculated quarterly at 9% over the prime rate. So if in Q1 the prime rate is 7%, the interest charges applied to the financing in Q1 would be 16%. If in Q2 the prime rate drops to 5%, the interest rates applied in Q2 would be calculated at 14%.
Some adjustable rate agreements will include a clause that limits the amount an interest rate can be raised (e.g. the rate will be evaluated on an annual basis and it can be raised no more than 2% per year). As with any financial decision, it is important to fully understand the terms and conditions of what your adjustable rate means, and how changes in the market might have an effect on your business.
It is also important to remember that some financial options for businesses do not have a fixed or adjustable rate, and some—like a Merchant Cash Advance from AdvanceMe—will not charge any interest rates at all.
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