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How do I read the index and margin of a variable rate?
A variable-rate agreement may describe a reference index and an additional margin.
Locate the reset method, observation date and any limits, rather than following a general news headline about interest rates.
Ask how a change affects payment size, term or both. A hypothetical change can explain the mechanism without predicting a future rate or claiming that the present payment will remain affordable.
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Definitions
- Nominal interest rate
- Stated rate used to calculate interest under the agreement; it does not describe every other charge.
- Annual comparison measure
- Annualized disclosure used to compare borrowing costs; its calculation and included charges depend on the jurisdiction and product.