What is the purpose of an interest rate cap?

An interest rate cap serves the primary function of limiting the fluctuations in the interest rate charged on a variable-rate loan. This means that it sets a maximum interest rate that can be applied to the loan, providing borrowers with a safeguard against excessively high interest rates that could make their repayments unaffordable. By establishing this ceiling, borrowers can have greater confidence in their ability to manage their financial commitments, as the cap helps prevent significant increases in monthly payment amounts due to rising interest rates.

While other options address different aspects of loans and payments, they do not align with the specific role of an interest rate cap, which is fundamentally about controlling the cost of borrowing through interest rate regulation.