Debts
A variable interest debt is a loan in which the specific value of the applicable interest rate does not remain constant over time, but fluctuates based on the evolution of an index or reference known to both parties, which is reviewed at each agreed-upon time period.
The borrower does not know at the time of signing or formalizing the loan the total amount of interest they will have to pay, and the financial institution granting it also does not know the total amount it will collect from the interest generated by the loan.
This is why, when a variable interest rate loan is formalized, the payment schedule included in the contract does not reflect all the installments to be paid, since the interest rate to be applied from a certain date onward is unknown — it will be determined by the reference index agreed upon by the parties.
In the contract you will find the payment schedule for the period in which the interest is known, which corresponds to the period during which the initial rate applies. This is the fixed interest rate applied to the loan for a brief period of time (before the referenced rate kicks in), starting on the loan signing date.
The cost of the loan, in terms of APR (Annual Percentage Rate), is the product of a simulation, since at the time of signing the various values the reference rate will take over the life of the operation are unknown.
What are the consequences of a variable interest debt?
This can lead to excessive increases and even triple the actual purchase price, generate additional charges for late payments, and if you fail to keep up with your payments, you could end up having the product repossessed.
The most advisable approach is to avoid taking on debt with variable interest, to be punctual with payments, and to always keep a payment history of the products you have acquired this way.