Interest Rate Collar

You borrowed money from a bank. Your stated floor rate is 4.5%. That's the lowest rate you can pay for having borrowed money to buy Betsy, your used army jeep with pink rims with 22,000 miles. But the ceiling rate you'll pay until you pay her off is 6.25%. Your rate floats as LIBOR plus 100 basis points, and with LIBOR at 3.5% today, you're just at your floor. If LIBOR goes lower, you'll still pay the 4.5% floor rate, even though with LIBOR at, say, 3.2%, you're 130 basis points over for your floor.

That's the interest rate collar on the low side. Then, on the high side, if LIBOR shoots to 6% and you'd owe, un-collared, 7% interest, you won't have to pay it, because your ceiling is 6.25%.

That's how collars work, and they're great for people who can afford interest charges within a range but not a cent more.

And we'll save our normal Fifty Shades joke on this one.