Definition & Meaning:

When you get a loan from a bank, the percentage of interest you pay for borrowing the money can either not change/vary during the entire time you repay the loan (called a 'fixed interest rate') or change/vary depending on the situation in the economy (called a 'variable interest rate').

With both types of interest rates there is a risk that you may end up paying more money in interest than you could have done. For example, if you have a loan with a 'fixed interest rate' and the central bank then reduces the interest rate for the country, you will be paying more money in interest than if your loan had a 'variable interest rate'.

To minimise the risk of paying more money in interest than you could have done, there is another type of interest rate. Where the interest you pay is both 'fixed rate' and 'variable rate'. And this is called a 'split interest rate'.

With a loan which has a 'split interest rate', a part of the interest you'll be charged will be 'fixed rate' (e.g. 50%), while the other part will be 'variable rate' (e.g. 50%).

There are two types of 'split interest rate' loans. The first, is where you pay both fixed and variable interest during the entire repayment period of the loan. The second, is where you are charged a 'fixed interest rate' at the beginning of repaying the loan (e.g. the first 3 years) and then pay a 'variable interest rate' for the rest of the time.

Banks and lending institutions normally only offer the option of having 'split rate' interest on large loans, like mortgages.

Also Called:

Mixed Rate, Split Rate.

Related Vocabulary:

Annual Percentage Rate, Redemption Penalties, The Principal, Fixed Interest Rate, Variable Interest Rate, Preferential Interest Rate.

To learn more vocabulary connected to loans, you can do a free online exercise on bank loan vocabulary.