A Variable-rate or Floating-rate loan is a loan in which the interest rate varies over the loan term. This is different from a fixed rate loan that has the same interest rate throughout the loan term.
The base interest rate is the prime rate, which is based on the Central Bank’s overnight rate. And then the Lender adds a specific percentage of interest on to this prime rate. For example, the loan interest rate could be Prime plus 2%.
Since the interest rate increases or decreases, that is, it varies or floats with the prime rate, it is called a variable or floating rate loan.