Prime Rate

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DEFINITION of 'Prime Rate'

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.

INVESTOPEDIA EXPLAINS '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. How does the equity risk premium correlate with the Federal Reserve's prime rate?

    The equity risk premium correlates negatively with the Federal Reserve's prime rate. When the prime rate is declining, the ... Read Full Answer >>
  2. What's the difference between the prime rate and the repo rate?

    The prime rate is used as the index for rates offered in consumer lending and loan products. When government central banks ... Read Full Answer >>
  3. What should ordinary borrowers know about the prime rate?

    The prime rate is set by governments and used as the index for consumer lending rates. Banks add a markup to the prime rate. ... Read Full Answer >>
  4. What's the difference between the prime rate and the discount rate?

    Both the prime rate and discount rate are used in the financial system and set in the United States by the Federal Reserve ... Read Full Answer >>
  5. How is the risk-free rate of interest used to calculate other types of interest rates ...

    The risk-free rate for bonds is used for pricing the yield spread as the difference between the interest rate on a bond and ... Read Full Answer >>
  6. What are the most important interest rates?

    The most important interest rates in the economy are the Federal funds rate and the discount rate. The Federal funds rate ... Read Full Answer >>
  7. How does a Registered Retirement Savings Plan (RRSP) loan work?

    The Government of Canada created Registered Retirement Savings Plans to allow Canadians to contribute tax-deferred income ... Read Full Answer >>
  8. What should you consider before taking a loan on your Registered Retirement Savings ...

    Deciding to borrow money from your retirement plan can be complicated. If you are considering taking out a loan from your ... Read Full Answer >>
  9. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    The difference between a fixed annual percentage rate (APR) and a variable APR is the time at which the rate can be changed. ... Read Full Answer >>
  10. What is a subprime mortgage?

    A subprime mortgage is a type of loan granted to individuals with poor credit histories (often below 600), who, as a result ... Read Full Answer >>
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