What is a variable interest rate?
- By Book Keeping Pros
- Sources checked 15 Oct 2026
Definition
A variable interest rate is an interest rate that can rise or fall during a loan's term as market conditions change. Each movement changes the interest charged, and the lender may also change the repayment amount. The alternative is a fixed interest rate, locked in for an agreed period that can run to the end of the loan.
For bookkeeping, a variable rate means the interest charged differs from one statement to the next. The amount to record each period comes from the lender's statement, not from a figure worked out once when the loan began, and reconciling the loan account against each statement picks up any change.
With a variable rate, the repayment figures in a budget or forecast are estimates. A budget or cash flow forecast that assumes one repayment figure for the whole year needs updating whenever the lender gives notice of a new rate, and a forecast can also show how cash flow would look if repayments rose.
In Australia
business.gov.au's glossary says a variable interest rate shifts with market conditions for as long as the loan runs, unlike a fixed interest rate, which holds for the loan term or an agreed timeframe.
In its guide to applying for a loan, business.gov.au sets fixed and variable rates side by side as one of the ways loans differ, describing a fixed interest rate as one that holds for the entire term. Its glossary entry on refinancing names a move from a fixed interest rate to a variable one as a reason to refinance.
Worked example
| Month | Balance at start (AUD) | Interest charged (AUD) | Repayment (AUD) | Balance at end (AUD) |
|---|---|---|---|---|
| July | 80,000.00 | 466.67 | 1,800.00 | 78,666.67 |
| August | 78,666.67 | 491.67 | 1,800.00 | 77,358.34 |
| September | 77,358.34 | 483.49 | 1,850.00 | 75,991.83 |
Illustrative example only: these rows show the method and are not sourced data.
Common mistakes
- Copying last month's interest figure into the books instead of taking it from the new statement.
- Budgeting the same repayment for every month of the year on a loan whose rate can change.
- Missing the lender's notice of a new repayment amount, so the scheduled payment falls short.
Related terms
Related service
Bank reconciliations
Each bank, card and loan account reconciled to its statement.
Sources
- Key financial terms
business.gov.au, Australian Government. Current at 15 October 2026, released 9 July 2024. Checked 15 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.
- Apply for a business loan
business.gov.au, Australian Government. Current at 16 October 2026, released 18 February 2026. Checked 16 October 2026.
© Commonwealth of Australia 2020, licensed under CC BY 3.0 AU. Licence: CC BY 3.0 AU.