Floating rate loan

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In business and finance, a floating rate loan (or a variable or adjustable rate loan) refers to a loan with a floating interest rate. The total rate paid by the customer "floats" in relation to some base rate, to which a spread or margin is added (or more rarely, subtracted). The term of the loan may be substantially longer than the basis from which the floating rate loan is priced; for example, a 25-year mortgage may be priced off the 6-month prime lending rate.

Floating rate loans are common in the banking industry and for large corporate customers. A floating rate mortgage is a mortgage with a floating rate, as opposed to a fixed rate loan.

In many countries, floating rate loans and mortgages predominate. They may be referred to by different names, such as an adjustable rate mortgage in the United States. In some countries, there may be no special name for this type of loan or mortgage, as floating rate lending may be the norm. For example, in Canada substantially all mortgages are floating rate mortgages; borrowers may choose to "fix" the interest rate for any period between six months and ten years, although the actual term of the loan may be 25 years or more.

Floating rate loans are sometimes referred to as bullet loans, although they are distinct concepts. In a bullet loan, a large payment (the "bullet") is payable at the end of the loan. A floating rate loan may or may not incorporate a bullet payment.