What Is The Prime Rate And How Does It Work? – An Absolute Guide
What Is The Prime Rate And How Does It Work? – An Absolute Guide
Abstract
Introduction to Prime Rate Whether you take a personal loan, car loan, student loan, or mortgage, the lender will charge an interest rate on the borrowed amount as compensation for lending you the money. How does the lender derive the rate to be charged to the borrower on any of these loans? Well, All the interest rates charged by the lenders depend on the prime rate. Prime Rate Definition A prime lending rate is the interest rate charged by banks or lenders to their creditworthy customers or corporate borrowers. How Does The Prime Rate Work? Just like the rules of lending vary in the financial market so does the prime rate. The prime lending rate you see online when you search on any search engine is the daily rate calculated by the wall street journal which is an average of the multiple lenders' prime lending rates. The reason why the lenders issue prime interest rates or a rate closest to their most creditworthy borrowers is that they are less likely to default on a loan hence the risk of lending to such borrowers is less. If the Federal Reserve increases this rate the prime interest rate will also increase and if the fed rate goes down so will the prime.