What is the 'Prime Rate'
The prime rate is the interest rate that commercial banks charge their most creditworthy 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 that banks use to lend to one another; the prime rate is also important for individual borrowers, as the prime rate directly affects the lending rates available for a mortgage, small business loan or personal loan.
BREAKING DOWN 'Prime Rate'
Default risk is the main determiner of the interest rate a bank charges 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 charged to a customer who has a higher likelihood of defaulting on a loan.The prime rate serves as a basis, or point of reference, for determining most other interest rates lenders make available to borrowers, even though it might not be specifically listed as a component of the rate ultimately charged. Interest rates serve as compensation for the risk taken on by the lender based on the borrowerâ€™s credit history and other financial details, and provide a way to cover costs associated with lending.
Prime Rates and Variable Interest Rates
In cases of variable interest rates, such as those used on certain credit cards, the cardâ€™s interest rate may be expressed as the prime rate plus a set percentage. This means the rate rises and falls with the prime rate but always remains a fixed percentage above the prime rate at all times.
Determining the Prime Rate
The prime rate is not set by a particular legal entity, and the prime rate used by one institution may be different than the prime rate in use by another. While changes to the Federal Reserveâ€™s prime rate are commonly noted by other U.S. institutions, and may be used to justify changes in the institutionâ€™s prime rate, it is not a requirement for the institution to raise its prime rate accordingly.
Prime Rate and BestQualified Customers
Generally, the prime rate is reserved for only the most qualified customers, determined as those who pose the least amount of risk of default. Prime rates may not be available to individual borrowers as often as to larger entities, such as particularly stable businesses.
Even if the prime rate is set at a particular percentage, such as 5%, that does not mean a lender cannot offer rates below that amount to wellqualified customers. The prime rate is considered a benchmark only, and though it is likely to be the lowest announced rate available, it should not be considered a mandatory minimum.

Wall Street Journal Prime Rate
An interest rate that large banks in the United States charge ... 
Variable Interest Rate
A variable interest rate is an interest rate on a loan or security ... 
Bank Rate
The interest rate at which a nation's central bank lends money ... 
Prime
A classification of borrowers, rates or holdings in the lending ... 
Key Rate
The specific interest rate that determines bank lending rates ... 
Prime Cost
A business's expenses for the materials and labor it uses in ...

Personal Finance
Explaining Prime Rate
Prime rate is the interest rate banks charge their best (e.g. prime) customers. 
Insights
What Is The Relationship Between The Federal Funds, Prime And LIBOR Rates?
The prime rate and LIBOR rate, two of the most prominent benchmark rates, tend to track the federal funds rate closely over time. However, during periods of economic turmoil, LIBOR appears more ... 
Insights
The Impact of a Fed Interest Rate Hike
The Federal Reserve recently raised benchmark interest rates. With much attention on the Fed's policy, here's what happens when the Fed hikes rates. 
Personal Finance
How Interest Rate Cuts Affect Consumers
Traders rejoice when the Fed drops the rate, but is it good news for all? Find out here. 
Investing
Forces Behind Interest Rates
Interest is a cost for one party, and income for another. Regardless of the perspective, interest rates are always changing. 
Personal Finance
How Banks Set Interest Rates on Your Loans
Many factors go into how banks set interest rates for loans. Use this information to negotiate the best possible rate when you're borrowing. 
Personal Finance
The Role of a Prime Broker
Understand the role of a prime brokerage, and learn about the services investment banks provide for hedge funds while in the role of being a prime broker. 
Insights
Overnight Rate
Learn about how banks use this interest rate when lending to other banks. 
Investing
How Interest Rates Affect Mutual Funds
Find out how changing interest rates impact mutual funds, including bond and money market funds, and how higher rates can discourage investors. 
Personal Finance
How the Federal Reserve Affects Your Mortgage
The Federal Reserve can impact the cost of funds for banks and consequently for mortgage borrowers when maintaining economic stability.

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 >> 
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 >> 
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 >> 
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 >> 
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 >> 
How does the equity risk premium correlate with the Federal Reserve's prime rate?
Learn about how the equity risk premium correlates with the Federal Reserve's prime rate. The Fed adjusts the prime rate ... Read Answer >>