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What is the Prime Rate

The prime rate is the lowest interest rate that banks will charge on loans at a given time, based on the Federal Funds Rate.

Individual banks set their own prime rate, which they may also call their "Reference Rate" or "Base Lending Rate." It is the least they will charge for a loan at a given time, based on the creditworthiness of the customer, and the only clients whose risk of default is low enough to approach the prime rate are very large commercial clients.

The prime rate index published by the Wall Street Journal becomes a benchmark for many kinds of lending nationwide. The prime rate is always going to move in step with the Federal Funds Rate, which is the rate that banks charge each other for overnight loans, and the largest banks will generally share the same prime rate.

What is Monetary Policy?
What is the Federal Funds Rate?

Keywords: loan interest rates, default risk, federal funds rate, prime rate, lending institutions,