Prime Rate

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What is the 'Prime Rate'

The prime rate is the interest rate that commercial banks charge their most credit-worthy customers. Generally a bank's best customers consist of large corporations. The prime interest rate, or prime lending rate, is largely determined by the federal funds rate, which is the overnight rate which banks lend to one another. The prime rate is also important for retail customers, as the prime rate directly affects the lending rates which are available for mortgage, small business and personal loans.

BREAKING DOWN 'Prime Rate'

Default risk is the main determiner of the interest rate a bank will charge a borrower. Because a bank's best customers have little chance of defaulting, the bank can charge them a rate that is lower than the rate that would be charged to a customer who has a higher likelihood of defaulting on a loan.

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RELATED FAQS
  1. What should ordinary borrowers know about the prime rate?

    Learn more about how prime rates are used in consumer lending and how consumers may obtain better interest rates at or near ... Read Answer >>
  2. Is the prime rate in the US different from the federal funds rate?

    Learn how the federal funds rate affects fluctuations in the prime rate and how following your bank's prime rate can help ... Read Answer >>
  3. What's the difference between the prime rate and the discount rate?

    Learn more about the prime rate and the discount rate and how the Federal Reserve uses these rates in the U.S. economy. Explore ... Read Answer >>
  4. How does the Wall Street Journal prime rate forecast work?

    Learn about the Wall Street Journal's prime interest rate methodology. Discover trailing financial indicators, and engage ... Read Answer >>
  5. How high has the prime rate ever gotten?

    Discover the highest value of the prime rate in United States' history and understand the assumptions and calculations that ... Read Answer >>
  6. What are the most important interest rates?

    Learn about the most important interest rates in the economy; the Federal funds rate and discount rate are set by the Federal ... Read Answer >>
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