What type of loan has a rate of 5% for 5 years, and a rate of 6% for the remaining 25 years?

What type of loan has a rate of 5% for 5 years, and a rate of 6% for the remaining 25 years?

• A. Fixed-rate loan
• B. Adjustable-rate loan
• C. Variable rate loan
• D. Balloon loan

Answer: (C)

A loan whose interest rate changes over time is described as a variable-rate loan. Here, the rate is 5% for the first five years and then 6% for the remaining twenty-five years, so the cost of borrowing isn’t constant across the term. That characteristic fits a variable-rate structure, which in many contexts is also called an adjustable-rate loan. It’s not a fixed-rate loan, since the rate wouldn’t change; it’s not a balloon loan, since there’s no large payment due at a specific point; and while an adjustable-rate loan is a type of variable-rate loan, the key idea shown—rates that move after an initial period—aligns with the concept of a variable-rate loan.

A loan whose interest rate changes over time is described as a variable-rate loan. Here, the rate is 5% for the first five years and then 6% for the remaining twenty-five years, so the cost of borrowing isn’t constant across the term. That characteristic fits a variable-rate structure, which in many contexts is also called an adjustable-rate loan. It’s not a fixed-rate loan, since the rate wouldn’t change; it’s not a balloon loan, since there’s no large payment due at a specific point; and while an adjustable-rate loan is a type of variable-rate loan, the key idea shown—rates that move after an initial period—aligns with the concept of a variable-rate loan.