Variable Rate Loan refers to a type of loan where the interest rate is not fixed but fluctuates over time based on market conditions. These changes are usually linked to a benchmark rate such as the Reserve Bank of India’s (RBI) repo rate or another external benchmark. As a result, your loan EMI can increase or decrease during the loan tenure depending on rate movements.

Unlike a fixed-rate loan, where the interest rate remains constant, a variable or floating rate loan reflects real-time changes in the lending market. When the benchmark rate rises, lenders increase the interest rate, leading to higher EMIs. Conversely, when rates fall, borrowers benefit from lower interest payments. This structure allows borrowers to take advantage of favourable rate cycles, though it also carries an element of uncertainty.

Variable rate loans are commonly used for home loans, personal loans, and business loans. They are ideal for borrowers who expect interest rates to decline or remain stable in the future. However, for those with limited income flexibility or long-term financial commitments, these loans can be risky as EMIs are not predictable.

Before opting for a variable rate loan, borrowers should assess their risk tolerance, financial stability, and future rate outlook. It’s also important to understand how often the rate is revised and how it affects the repayment schedule. Reviewing the loan agreement’s terms and the benchmark reference can help avoid surprises.

In summary, a variable rate loan offers potential savings when market rates fall but can also lead to higher costs during rate hikes. Borrowers should make informed decisions based on thorough research, financial planning, and understanding of economic trends.