What Is a LIBOR Loan?

by Michael Keenan ; Updated July 27, 2017

LIBOR stands for London Interbank Offered Rate, which is an interest rate calculated each day based on the rate that international banks lend money to each other on a short-term basis. This rate is used to determine the interest rate on many other loans.

Significance

According to USA Today, the LIBOR is used to determine the interest rate on many corporate loans, mortgages and student loans. As the LIBOR rate changes, these loans can become more or less expensive.

Function

LIBOR loans are adjustable rate loans, which means that the interest rate on the loan is periodically adjusted to take into account the change in the LIBOR rate. Most loans have a margin, which is a fixed percentage added to the LIBOR rate to find the interest rate for the loan.

Benefits

By having an adjustable rate loan tied to the LIBOR, if interest rates drop, the loan rate will drop without you having to refinance. However, if loan rates rise, so too will your interest rate.

About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."