prime interest rate

Investment Dictionary -> prime interest rate

The banks keep their prime interest rate for the most creditworthy clients. These are usually business customers who are considered the most stable and prominent. The major banks keep the rate almost the same. When adjustments to the rate are made, they are done at the same time by the banks. The prime rate is, however, not adjusted on a regular basis. Fed Funds rate is also always considered when latter is changed.

In the United States, the prime rate is approximately 300 points above the funds rate. The Federal Reserve funding requirements are fulfilled by the banks with overnight loans for which the federal funds rate applies. This rate and a little addition is frequently used for lending money to a good number of creditworthy customers. The same applies for Libor- the London Interbank Offered Rate. Eight times a year, there is a meeting of the Federal Open Market Committee which sets a target for the federal funds rate. Prime interest rate derives from this base rate.

Those who provide customer and commercial loan products make use of the prime interest rate as a basis for their landing rate. Then, they apply a profit margin proportionate to the loan risk. Financial institutions in the U.S. use the rate to price particular time deposit products such as certificates of deposit.

Note that the prime rate is an index, not a law. Sometimes, business owners or consumers may find an interest rate that is lower than the prime rate applied to a credit card or a loan bank product. As a way of generating business, the lenders sometimes offer loans that are below the rate to customers who are considered highly qualified. In addition, when the loan product is considered secure, interest rates below the prime interest rate become relatively common.