Prime Rate

AAA

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.

RELATED TERMS
  1. Discount Rate

    The interest rate charged to commercial banks and other depository ...
  2. Federal Reserve Bank

    The central bank of the United States and the most powerful financial ...
  3. Subprime Loan

    A type of loan that is offered at a rate above prime to individuals ...
  4. Cap

    The highest point to which an adjustable rate mortgage (ARM) ...
  5. Prime

    A classification of borrowers, rates or holdings in the lending ...
  6. Bank Rate Monitor Index

    An index of money market interest rates paid on deposits at 1 ...
Related Articles
  1. Retirement

    What should you consider before taking ...

  2. Retirement

    How does a Registered Retirement Savings ...

  3. Credit & Loans

    What is the difference between a fixed ...

  4. A credit rating is a useful tool not only for the investor, but also for the entities looking for investors.
    Investing Basics

    What Is A Corporate Credit Rating?

Hot Definitions
  1. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  2. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  3. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  4. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  5. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  6. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
Trading Center