What is Prime Rate?
The Short Answer
Prime Rate explained simply
The Prime Rate is the interest rate that commercial banks charge their most creditworthy corporate customers. Think of it as the baseline interest rate. When you hear about the Federal Reserve raising or lowering interest rates, they are often influencing the Prime Rate. This rate then affects many other variable-rate loans, including small business loans, lines of credit, and some mortgages. It is a key indicator of the overall cost of borrowing in the economy.
Real-World Example
How Prime Rate Affects a Business Loan
Let's say a small business gets a line of credit with an interest rate of "Prime + 2%." If the Prime Rate is 5%, their interest rate is 7%. If the Prime Rate increases to 6%, their interest rate automatically goes up to 8%. This means their monthly payments will increase, impacting their cash flow.
Why this matters
The Prime Rate matters because it directly impacts the cost of borrowing for businesses. A higher Prime Rate means higher interest payments on variable-rate loans, which can reduce profitability and make it harder to invest in growth. Understanding the Prime Rate helps you anticipate changes in your loan costs and plan your finances accordingly.
Always keep an eye on the Prime Rate if you have variable-rate loans. Even small changes can add up and affect your monthly budget.
Always keep an eye on the Prime Rate if you have variable-rate loans. Even small changes can add up and affect your monthly budget.
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