Capital & Financing

Interest-rate Risk

Understand interest-rate risk: the danger that a variable-rate loan gets more expensive when rates rise, turning affordable debt unaffordable through a cost you don't control.

  • Intermediate
  • 12 min total
  • 13 chapters

What decision this helps you make: Whether to borrow at a fixed or variable rate, and how to stress-test variable debt for a higher-rate world.

What this topic is

Interest-rate risk is the risk that a borrower's debt gets more expensive when interest rates rise. It arises with variable-rate debt, whose payment resets with a benchmark; fixed-rate debt removes it.

Why it matters

Rates are outside your control, so a variable-rate loan that's affordable today can squeeze your payments, and your debt-service coverage, if rates climb. Fixed rates buy certainty for a modest premium.

Who should learn it

Any owner choosing between fixed and variable debt, or carrying variable-rate loans.

What you will understand

  • Understand interest-rate risk and where it comes from
  • See how a variable rate raises the payment
  • Know when to prefer fixed vs. variable
  • Stress-test variable debt at a higher rate

Prerequisites

Common misconception

"A variable rate is cheaper, so it's the better deal." A variable rate is often lower to start, but its cost is a bet on future rates you don't control: interest-rate risk. If rates rise several points, the payment climbs with them, and a loan that was comfortable can strain or break the business. A fixed rate costs a little more upfront but removes that risk. Choose based on whether the business could absorb a higher-rate world, not just today's rate.