Prime Rate

The prime rate is the interest rate that commercial banks charge their most creditworthy corporate customers. It serves as a benchmark for various types of loans, including personal loans, small business loans, and mortgages. The prime rate is influenced by the federal funds rate, which is set by the Federal Reserve, and typically moves in tandem with changes in monetary policy. Banks often use the prime rate as a base rate, adding a margin to determine the interest rates charged to other borrowers.

Example

If the prime rate is 5%, a bank might offer a business loan to a less creditworthy borrower at a rate of prime plus 2%, resulting in a 7% interest rate.