What does Floor mean?

The floor is the minimum set interest rate payable by the borrower for the term of the loan. It is especially a characteristic for variable rate loans/credits, and it basically works in the favor of the lender and not the borrower. Interest rates are in close correlation, almost dependant on the prime rate, and it fluctuates along with it. So, when the base rate grows, the interest rates charged by the lender will also raise above the floor; on the other hand, when the base rate drops the interest rates will also drop, but not below the set floor. It is the same procedure applied to any loans or mortgages as well.

Because credit card issuers link their interest rates to the prime rate fluctuations, the interest rates the customer pays for become also subject to the base rate fluctuations. Interestingly enough however, when for example the prime rate drops significantly, lenders will not cut through the set minimum payable interest as well (the floor).