Definition: The prime interest rate is what banks charge their best customers. Also known as the prime lending rate, it is based on the Fed Funds rate. For this reason, it is usually the best loan rate available to non-banks.
The prime interest rate is important because it affects liquidity in the financial markets. A low rate increases liquidity by making loans less expensive, therefore easier to get. When prime lending rates are low, businesses expand and so does the economy.
Similarly, when the prime lending rate is high, then liquidity dries up,and the economy will start to slow.For this reason, banks will usually only raise the prime interest rate when the Fed Funds rate is increased. This is true even though banks would technically make more more on an individual loan when rates are higher. However, since this would decrease the number of loans applied for, this would slow the loan business overall.
Also Known As: prime lending rate
Examples:
Only those with good credit histories will qualify for the prime interest rate.
