Rate Lock

Financial Dictionary -> Loans -> Rate Lock

When taking out a loan the amount borrowed is called the principal. On top of this borrowers pay an interest based on a percentage of the principal amount. This is called the interest rate. Usually as per the loan agreement interest rates will either by fixed or variable. Fixed meaning the interest rate does not change throughout the repayment period, variable meaning it fluctuates in line with national standards.

Some lenders offer what is called a rate lock on variable interest rate loans. This is a temporary lock on the interest rate. In other words for a given period of time the interest rate will be fixed. This will usually occur when interest rates are most volatile. Usually this is only a short term agreement and the interest rate will eventually go back to be variable.

If a loan is already going by a fixed rate of interest the lender may still negotiate a rate lock at a different rate depending on how the market has changed since the rate was fixed in to place.

It is common for a lender to offer a rate lock for the first 30 to 60 days of a loan agreement as an incentive for the borrower to choose them over another lender. Loans are often marketed with rate locks to draw in potential customers.