Prime Bank Loans (Prime Rate) Explained:

Now what exactly is Prime Rate? The Prime Interest Rate is the interest rate charged by banks to customers that qualify based on high credit scores, documentation standards, and minimum asset requirements. Prime rate is generally offered to the banks most financially stable clients when it comes to real estate financing. This rate is almost always the same when offered by multiple banks.

Adjustments to the prime rate are made by banks at the same time. (Think when gas prices change at gas stations simultaneously) Prime Rate does not adjust regularly or adhere to a cycle. The Prime Rate is usually adjusted at the same time and in direct correlation to adjustments in the Fed Funds Rate.

What is the prime rate, and who borrows at that interest rate?

This usually is an interesting question for many borrowers. Prime Rate is generally a "reference" or "base rate" that banks will use to set pricing or interest rates on many of their commercial loans and some of their consumer loan products. The prime rate tracks fairly closely with other short-term interest rates, such as the overnight federal funds rate.

How important is the prime rate for business lending?

The prime rate remains an important reference rate for commercial banks, although its use has changed over time. About one-third of the value of all commercial loans made by the banks surveyed was priced off of the prime rate. Always remember that rates being offered to consumers from banks have the ability to be up sold.

The share of loans priced off Prime Rate vary significantly according to a number of factors which include the type and size of financial institution making the loan, the size and maturity of the loan, how the loan is priced out, and whether the loan was secured with collateral.

Which banks typically tie loans to the prime rate and which types of loans are likely to be priced off of the prime rate?

Whether you’re a consumer borrowing against your home or on your credit card with a floating interest rate like the prime rate, or a business-owner taking out a commercial loan priced off of the prime rate, knowing what the prime rate is and how it behaves over time is important to your financial well being.