A variable interest rate is an interest rate on a loan or financial product that can change over time. This rate is often tied to a benchmark rate, such as the LIBOR or the Federal Funds Rate, which fluctuates based on market conditions. As a result, monthly payments can increase or decrease, affecting the total cost of borrowing. Borrowers with a variable interest rate may benefit from lower initial rates compared to fixed rates. However, they also face the risk of rising rates, which can lead to higher payments in the future. Understanding this type of rate is essential for making informed financial decisions.