prime rate

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base rate that banks use in pricing commercial loans to their best and most creditworthy customers. The rate is determined by the Federal Reserve’s decision to raise or lower prevailing interest rates for short-term borrowing. Though some banks charge their best customers more and some less than the official prime rate, the rate tends to become standard across the banking industry when a major bank moves its prime up or down. The rate is a key interest rate, since loans to less-creditworthy customers are often tied to the prime rate.
For example, a Blue Chip company may borrow at a prime rate of 5%, but a less-well-established small business may borrow from the same bank at prime plus 2, or 7%. Many consumer loans, such as home equity, automobile, mortgage, and credit card loans, are tied to the prime rate. Although the major bank prime rate is the definitive “best rate” reference point, many banks, particularly those in outlying regions, have a two-tier system, whereby smaller companies of top credit standing may borrow at an even lower rate.

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The lowest commercial interest rate charged by banks on short-term loans to their most creditworthy customers. The prime rate is not the same as the long-term mortgage rate, though it may influence long-term rates. Also, it is not the same as the consumer loan rate that is charged on personal property loans and credit cards.
Mortgage rates and consumer loan rates are generally higher than the prime rate, but exceptions occur at times.


Example: Bank of America and Citigroup offer a prime rate of 7%.
Chevron/Texaco is a prime customer and at that rate may borrow loans up to 270 days. Bank of America offers construction loans at 4
points over the prime rate.

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This entry contains information applicable to United States law only.

The lowest rate of interest that a financial institution, such as a bank, charges its best customers, usually large corporations, for short-term unsecured loans.

The prime lending rate is an economic indicator and is often used as a measuring point for adjusting interest rates on other types of loans. The rate varies according to economic factors.

The interest rate that banks charge to corporations that are considered excellent risks.

The prime rate is usually the lowest prevailing interest rate; if it rises, rates available to consumers will soon rise.

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 Says:
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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For a list of words related to prime rate, see:

• Banking and Financial Services - prime rate: rate of interest charged by banks on loans to major borrowers, esp. businesses

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