What is the Prime Rate?

Prime RateThe Prime Rate is the lowest short term interest rate that commercial banks charge to their best and most credit worthy customers.

Some adjustable rate loans are tied to the prime rate. This type of loan is usually referred to as Prime Plus and the rate moves up or down based on changes in the prime rate.

A very good customer may pay the prime rate, while a less creditworthy customer will pay a rate pegged to the prime rate with an additional percentage added on.

In the latter case, the loan rate is calculated by taking the Prime Rate and adding an agreed upon percentage. For example, if the Prime Rate is 3.5%, a rate of Prime + 2% would be a loan rate of 5.5%.

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