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Simple English definitions for legal terms
index (finance)
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A quick definition of index (finance):
Index (Finance): An index is a number that helps determine how much interest you have to pay on a loan that can change over time. It is like a measuring stick that tells you how much you need to pay based on what is happening in the market. Some common indices include LIBOR, COFI, and the prime rate listed in The Wall Street Journal.
A more thorough explanation:
An index is a type of interest rate that is used to determine changes in interest rates for loans that have variable rates. This means that the interest rate on the loan will change based on the index rate. There are several common indices that are used, including:
- The six-month London Interbank Offered Rate (LIBOR)
- The Federal Home Loan Bank 11th District Cost of Funds (COFI)
- The prime rate as listed in The Wall Street Journal
For example, if you have an adjustable-rate mortgage, your interest rate may be tied to the LIBOR index. If the LIBOR rate goes up, your interest rate will also go up, which means your monthly mortgage payment will increase. Similarly, if the COFI index goes down, the interest rate on your variable rate loan may also go down, which could result in a lower monthly payment.
Overall, indices are important because they help determine the interest rates on many types of loans, which can have a big impact on borrowers' monthly payments and overall financial well-being.