What type of interest rate changes over time as market rates fluctuate?

The type of interest rate that changes over time as market rates fluctuate is variable interest. This kind of interest is typically tied to a benchmark rate, such as the prime rate or LIBOR, and can increase or decrease depending on market conditions. This means that the borrower may experience different payment amounts over the life of the loan, which can be beneficial if market rates drop, but it also carries the risk of increased payments if market rates rise.

Variable interest offers flexibility and can potentially save money if the interest rates move favorably. However, it also introduces uncertainty compared to fixed interest rates, which remain constant throughout the term of the loan and protect borrowers from fluctuations. Consequently, understanding how variable interest operates is crucial for informed financial decision-making.