# floating rate

## Definition

Any interest rate that changes on a periodic basis. The change is usually tied to movement of an outside indicator, such as the prime interest rate. Movement above or below certain levels is often prevented by a predetermined floor and ceiling for a given rate. For example, you might see a rate set at "prime plus 2%". This means that the rate on the loan will always be 2% higher than the prime rate, which changes regularly to take into account changes in the inflation rate. For an individual taking out a loan when rates are low, a fixed rate loan would allow him or her to "lock in" the low rates and not be concerned with fluctuations.
On the other hand, if interest rates were historically high at the time of the loan, he or she would benefit from a floating rate loan, because as the prime rate fell to historically normal levels, the rate on the loan would decrease. also called adjustable rate.

## Use floating rate in a sentence

You need to understand how much the floating rate will be so that you can factor that into how much you owe.

While the fixed interest rate offered the company more stability, they decided to captialize on the short-term savings of a floating rate loan.