What is a prime rate?
Prime rate definition: The interest rate which is charged to borrowers by lenders, who they think are most worthy of credit. This interest rate differs slightly among banks. Modifications of the prime interest rate are usually done by most banks at the same time, but, this does not happen often. Prime rate is the interest rate that lenders or banks charge their most favored and credit-worthy customers. Loan products such as automobile and personal loans often use the prime rates as a base rate. In addition, some commercial financing and credit cards might use the prime rate as a base. Usually, prime rate for credit cards and personal loan customers are charged interest rates which are as a minimum, a few points higher than the prime rate. Since the prime rate is fixed to credit, interest rates increases as creditworthiness decreases. Additionally, rates fluctuate according to economic conditions. Moreover, prime rates might be different among various banks.
Every bank or financial organization quotes their own prime rate interest. Financial institutions often opt to offer prime interest rates which have been fixed by large commercial banking organizations. Some financial institutions within the United States might look for the average prime lending rate of the more famous commercial banking organization from the Wall Street Journal.
Whenever banks provide their credit card customers with rates, they often begin with prime rate and then add a percentage. This percentage differs and mirrors the bank’s apparent risk in providing the credit cards rates. The added percentage to the prime interest rate also consists of revenue for the bank. Usually, the prime interest rate is around 3% higher than the rate of the federal funds. This rate is what the banks charges when lending each other. As a result, the federal funds rate is decided by the rate that banking institutions borrow from the Federal Reserve. That rate is the discount rate.
Large companies are the ones that benefit mostly from borrowing at prime lending rates. This is due to the banking organizations belief that their large company customers will not fail to pay on loans than other kinds of customers. When clients pose minimal danger to banking institutions, those organizations are more comfortable with lending to them and providing better rates.
What is a subprime rate?
Subprime loan definition: Subprime is a term that is sometimes used regarding loans and other financial products. These financial products may comprise loans, lines of credit for those who have low credit scores or persons with little credit histories and credit cards. Persons who have a bad credit history cannot benefit from prime interest rate and may only be eligible for a subprime loan. These persons are normally charged a subprime or higher rate because of the supposed risk to the lenders.