An interest rate that can change over time based on a benchmark rate.
For example, a business line of credit is priced at prime plus 2.5%. When the prime rate is 5.5%, the business pays 8.0%. If the Bank of Canada cuts rates by 50 basis points, the floating rate drops to 7.5%, reducing the monthly interest cost on the outstanding balance.
Why it matters: It shifts interest rate risk from the lender to the borrower; in a rising rate environment, monthly payments can quickly become unaffordable.
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