prime rate

Prime rate

The interest rate at which banks lend to their best (prime) customers. More often than not, a bank's most creditworthy customers borrow at rates below the prime rate.

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prime rate

A short-term interest rate quoted by a commercial bank as an indication of the rate being charged on loans to its best commercial customers. Even though banks frequently charge more and sometimes less than the quoted prime rate, it is a benchmark against which other rates are measured and often keyed. For various reasons, a rising prime rate is generally considered detrimental to security prices. Also called prime.

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Prime rate. The prime rate is a benchmark for interest rates on business and consumer loans.

For example, a bank may charge you the prime rate plus two percentage points on a car loan or home equity loan.

The prime rate is determined by the federal funds rate, which is the rate banks charge each other to borrow money overnight. If banks must pay more to borrow, they raise the prime rate. If their cost drops, they drop the prime rate. The difference between the two rates is three percentage points, with the prime rate always the higher number.

The federal funds rate itself is determined by supply and demand, prompted by the actions of the Open Market Committee of the Federal Reserve to increase or decrease the money supply.

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prime rate

Traditionally defined as the rate of interest charged by a financial institution to its best customers. In reality, many commercial loans are quoted in terms of “prime minus one quarter,”for example, which indicates there are better rates than prime. In addition, many lenders offer rates based on the London Interbank Offered Rate (LIBOR), resulting in interest rates less than prime. Today,prime rate is often just a published rate by a financial institution,called its prime rate whether it is the lowest offered rate or not.

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Prime Rate

What Does Prime Rate Mean?

The interest rate charged by commercial banks to their most creditworthy customers. Generally, a bank's best customers consist of large corporations.

Investopedia explains Prime Rate

Default risk is a major consideration in setting interest rates. Because a bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate charged to a customer with a higher likelihood of defaulting on a loan.

Related Terms:
• Basis Point
• Discount Rate
• Federal Funds Rate
• Interest Rate
• Working Capital