Prime Rate

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Prime Rate

The prime rate is the interest rate commercial banks charge their best (or prime)borrowers. It is based on banks’ cost of funds (savings rates) as well as availability of money; desire to make new loans and general market conditions. But it has become more than that: The prime rate is an index used to calculate other interest rates, both personal and business. For example, personal loan rates might be priced at 6 percent over prime. If prime were 5 percent, personal loans would cost you 11 percent. Many banks will use the Wall Street Prime rate. This is a rate set by the top lending banks in the country.

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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