Business, Legal & Accounting Glossary
The interest rates that banks charge to their most creditworthy customers. The prime rate is an important reference number, because loans to all other customers are connected to it on a percentage basis.
The interest rate that commercial banks charge their most creditworthy borrowers, such as large corporations. The prime rate is a lagging indicator. also called prime.
In the US, the prime rate was historically defined as the interest rate banks charge their best customers for loans.
In fact, some borrowers occasionally receive credit for below the prime rate. The prime rate is seldom changed, though most banks tend to change it at the same time. The best-known prime rate index is the Wall Street Journal prime rate. The Wall Street Journal announces a change in “the” prime rate whenever at least 23 of the 30 largest banks make a change to their stated prime rate. In practice, the prime rate tends to work out to three percentage points above the nominal Federal Funds Rate set by the Board of Governors of the Federal Reserve. The prime rate has been eclipsed in importance by LIBOR for setting interest rates on most loans for bank customers.
Due to Gerald’s great credit rating, the bank offered him a mortgage at the prime rate.
One way for governments to control the economy is by adjusting the prime rate.
Prime
Lagging Indicator
Subprime rate
Interest
LIBOR
Federal funds rate
The prime rate is the interest rate banks charge on loans to their most credit-worthy borrowers, usually large, stable businesses. The rate is almost always the same among major banks.
A prime rate by any other name might be a prime lending rate, the U.S. prime rate, or The Wall Street Journal prime rate. Check the Journal or other financial publications to find the day’s rate, a benchmark that serves as the starting point for interest rates charged on things such as home-equity loans and credit cards. Here’s some wonkery on why the venerable Journal gets to claim the rate: The WSJ keeps track of the interest rates that the 30 largest U.S. banks are charging their most credit-worthy customers. The lenders generally have the same prime rate — based on the federal funds rate — and the Journal changes the rate when at least three-quarters of the banks polled change their rates.
Borrowers want to pay attention to the ‘prime plus’ phrases. A sirloin steak deemed prime + 10 might perk up your taste buds more than one rated just prime + 3, but that reasoning is turned on its head when shopping for loans. A loan offered at prime + 2, for instance, would have an interest rate of the prime rate plus 2 percentage points. Loans can be made for interest rates lower than the prime rate.
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This glossary post was last updated: 29th November, 2021 | 0 Views.