What is the Prime Rate
Prime rate is defined as the lowest interest rate offered by a bank to their best customers for commercial loans. It is considered as a base from where other interest rates come. It is also known as prime loan rate. This rate is used by retail banks and credit unions to mark the minimum pricing for short term loans. This rate is consistent which offers the customers to do comparison of the products and also helps in unrivaled competitiveness in the market and function profitably. Prime rate is considered as the base of determination of the value of consumer loans and the commercial products by the lenders. Here the margin is in the light of the risk that the loan will be covering. Though a prime rate is important, it only serves as an index, but not to be strictly adhered as it is not a law. Hence, it is very easy to find an interest rate below a prime rate.
The rate value is an invariable mark which refers the base interest rate for American financial market. It is commonly known as Federal Funds Target Rate which is set by Federal Reserve. The group of people related to Federal Reserve, also known as FOMC meets after every six weeks and votes on the changes to Federal Funds Target Rate. These people are responsible to make sure that U.S has an enough job market. Though the economy makes its way through the growth curve, it is their responsibility to keep inflation in check and maintain stability.
Changes in this rate also determine any variable rate on customer’s credit account and any adjustable rate mortgages that they may have. Student, equity or auto loans always have a chance of change in product rate with the alteration of overall rates, because it depends upon the national prime rate.
Even the credit card issuer can use the prime rate; if they are having a good credit history they will get a better prime rate. The companies will use the base interest rate to start with which is the prime rate charged by most of the banks to their customers. When a customer applies for a credit card, the company goes through their credit score, which includes payment history of the customer, available credit and the amount of debt. If the customer will be having a good history, the bank will add low margin rate to the prime rate to get the interest rate a customer has to pay on the card. And if the customer has a poor credit card history due to any reason, the company will add a higher margin rate to the prime rate.