A floating interest rate is a rate that can move during the loan period because it is linked to a benchmark or the lender's approved pricing framework.
It is usually expressed as:
Benchmark + Spread = Applicable interest rate
When the benchmark changes, the applicable loan rate may reset on the agreed date.
The Key Fact Statement should identify:
- Rate type
- Benchmark
- Spread
- Reset frequency
The two building blocks
A floating rate generally has two components.
Benchmark
The benchmark is the reference rate that can move over time.
Spread
The spread is the additional percentage added by the lender based on the product and borrower pricing.
For example:
Benchmark: 7.5%
Spread: 2.5%
Therefore:
Applicable rate = 7.5% + 2.5% = 10%
The rate remains applicable until the next reset or relevant contractual change.
Floating does not mean daily rate changes
Interest may be calculated every day, but this does not mean the annual interest rate itself changes every day.
These are two separate concepts.
Daily accrual means interest is calculated using each day's outstanding balance.
Rate reset means the annual percentage rate changes according to the agreed benchmark and reset schedule.
How the impact appears in an overdraft
A higher interest rate affects different loan structures differently.
With a conventional term loan, a rate increase may result in:
- A higher EMI
- A longer tenure
- Another adjustment under the loan terms
A LAMF overdraft often does not have a fixed EMI.
Therefore, if the annual rate increases, the monthly interest amount may simply rise for the same utilised balance.
Questions to ask before accepting
Before taking a floating-rate facility, ask:
- Which benchmark is used?
- How often is the rate reset?
- Can the spread change?
- How will rate changes be communicated?
- What is the current APR?
The Key Fact Statement and sanction letter should explain these points.
Do not assume that a floating rate automatically means a cheaper loan.
| Component | Illustrative value |
|---|---|
| Benchmark | 7.5% |
| Spread | 2.5% |
| Current floating rate | 10.0% p.a. |
| If benchmark rises by 0.50% | Rate may reset to 10.5% p.a. |
Compare the rate correctly
Ask for:
- Annual rate
- Fixed or floating classification
- Benchmark
- Spread
- Reset frequency
- APR
Estimate the cost using your likely average outstanding balance rather than your maximum sanctioned limit.
A slightly higher rate with lower fees may be cheaper for short-term borrowing, while a lower rate matters more for larger or longer utilisation.
The Bottom Line
A floating rate shares interest-rate movement with the borrower.
It can fall as well as rise, but the timing of any change depends on the contract.
Understand the benchmark, spread and reset cycle before comparing a floating-rate facility with a fixed-rate alternative.
Facing a financial emergency?
Check how much credit your mutual funds may support
Get an indicative eligibility check. The final limit and terms are decided by the lending partner.
Continue learning
Related questions
Explore other topics
Also read
Information on this page is general in nature. Eligibility, approved schemes, LTV, rates and charges depend on the regulated lender's current policy and the final loan documents. This is not financial advice. The content is purely for educational purposes.