Bank Prime (Interest) Rate

By: EconomyWatch   Date: 14 October 2010

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The prime rate is the lending rate that banks or other financial institutions offer to their most creditworthy clients. They are the best interest rates that are offered by banks to people having a financially sound background and impressive credit and payment history at financial institutions.

Bank prime rates change in accordance with the Fed funds rate issued by the Federal Reserve Bank. The prime interest rate is usually set 3% higher rate than the Fed funds rate. This margin between the prime rate and the Fed funds rate accounts for a bank’s profits for lending to its most valued customers.

Significance of the Prime Rate

The prime rate is used as an index to determine the adjustable rate mortgage (ARM) and the interest rates for credit cards and other variable rate loans, such as home loans, business loans and auto loans. The interest rates for these loans are always higher than the prime rates because other customers do not enjoy the same creditworthy status as the bank’s most prestigious clients.

The interest rate for other types of loans fluctuates in accordance with the prime interest rate. However, the actual rate applicable for an individual depends on the person’s financial profile.

How to Get Prime Rates on Loans

The credit history of an individual determines his/her eligibility for prime rates on mortgages. For an average banking customer, it is almost impossible to strike a loan deal at prime lending rates. However, the following steps can help you to bring the interest rate on your loan closer to the prime interest rate:

  • Develop a good credit history. This is possible by regularly repaying previous loans and credit debts.

 

  • Ask for a different loan amount. At times, an individual is not offered prime rates because the loan amount is higher than the credit limit. Enquire about the maximum amount you can borrow at prime rates and try to settle for that.

 

  • Seek a cosigner to back your credit soundness. Friends or family members with strong financial backgrounds can endorse your loan application. This is one of the most viable methods of obtaining a loan at the prime interest rate.

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