Interest Rate Ceiling Definition
An interest loan ceiling is a regulatory measure that prevents lenders and financial institutions from charging more than a certain level of interest on a loan. It is also referred to as the highest interest rate that an institution can charge the borrower, the loan documents must contain details of the interest rate ceiling if the loan has one.
The fear of having to pay an increased rate of interest in the future is reduced in the interest rate ceiling. Ceilings are often included in the issuing of ARM as it prevents interest rates from increasing above agreed rates. The interest rate ceiling is the highest interest rate possible under an adjustable-rate mortgage (ARM).
An interest rate floor is the opposite of interest rate ceiling, the former refers to a minimum limit a bank will charge for the loan.
A Little More on What is an Interest Rate Ceiling
The government financial laws embody an inclusion of high-interest rates in every loan offer in the state if not, the interest rate is included by the lenders so as to improve the marketability of a variable rate product. The above are reasons why an interest rate ceiling may be included in the loan terms of the borrower.
In scenarios where a product has an interest rate ceiling, the borrower states the rate which would be charged on a loan. This product is referred to as a viable rate product.
Adjustable-rate mortgages (ARMs) allow borrowers to pay lower interest rates on their loans for a specific period, after which the rates get changed during the viable rate time of the loan. This variable rate cannot exceed the ceiling rate but if the adjustable-rate mortgage loan has a capped increase then the borrower’s rate is increased when rates are high. This increased rate is at 2%. Another name for the ceiling rate is lifetime maximum rate.
In viable rate products, when the maximum interest rate is reached, the rates cannot exceed the maximum rate and when rate falls, the interest rates payable by the borrower reduces.
Interest Rate Regulations
Usury laws are instituted by the government, they are used to control interest rates most especially in the US. There are cases of exceptions in individual usury laws. These laws apply a rate charged to borrowers in lending products. State governments makes their own usury regulations.
Usury caps entail regulations that govern every loan and credit. Lenders are strictly guided by these usury caps and they apply to both fixed interest rate products and variable rate interest products. Usury rates extend up to 35%. Some cases warrant variable rate interest products having an interest rate ceiling dictated by a state’s usury cap other than the lender of the product. It is important to note that traditional bank transactions are guided by state usury limits.