Floating interest rates can change from month to month depending on the conditions of the credit market. Floating interest rates follow the laws of supply and demand.

Interest rates increase ↑ when
  • the supply of loan money decreases (there's not enough money to go around, so people are willing to pay more interest to get some), and
  • the demand for loan money increases.
Interest rates decrease ↓ when
  • the supply of loan money increases (there's lots of money available for loans and suppliers lower interest rates to encourage people to borrow), and
  • the demand for loan money decreases.

Fixed interest rates do not change over the life of the loan.

The prime lending rate (or prime rate) is the interest rate commercial banks charge on floating rate loans to the most credit-worthy businesses (such as large corporations). For example, a small business may be able to borrow money at prime plus 3%. If the prime rate were 6%, the interest rate on the loan would be 9%. In Canada in 2017, the prime rate was 2.95%.

Businesses watch closely the changes in the prime rate. Few businesses qualify to borrow at the prime rate, but they use the prime rate as a reference point. Usually, the prime interest rate moves slowly. Nevertheless, when the prime rate rises, often loan rates rise also.