prime rate
The interest rate that commercial banks charge their most creditworthy customers, which influences rates across the economy.
Example
“When the Federal Reserve raised rates, the prime rate increased and mortgages became more expensive.”
Memory Tip
PRIME = best. The prime rate is the BEST (lowest) rate banks offer their top customers.
Why It Matters
The prime rate serves as a benchmark for many consumer loans and credit products, meaning changes to it directly affect the interest rates you pay on mortgages, auto loans, and credit cards. Understanding how the prime rate moves helps you anticipate when borrowing costs will increase or decrease, allowing you to make better timing decisions for major purchases or refinancing opportunities.
Common Misconception
Many people believe they can borrow money at the prime rate itself, but the prime rate only applies to banks' most creditworthy customers with excellent credit scores and strong financial positions. Most consumers actually pay a higher rate by adding a margin or spread to the prime rate, meaning your actual interest rate will be several percentage points above the published prime rate.
In Practice
If the prime rate is 8.5 percent and a credit card issuer sets your margin at 15 percent above prime, your actual interest rate becomes 23.5 percent on unpaid balances. Similarly, when the Federal Reserve raised the prime rate from 3.0 percent to 8.3 percent between 2022 and 2023, adjustable-rate mortgages and home equity lines of credit increased significantly, causing monthly payments to jump by hundreds of dollars for borrowers with variable rate loans.
Etymology
Prime (first, best) + rate — the best (lowest) rate offered to top customers.
Common Misspellings
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