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What is the Prime Interest Rate

History dictates that the prime interest rate, which is the best, most beneficial interest rate that lenders can offer their customers who have good credit, hinges on several factors within the US economy, the looseness of credit lending that currently prevails at the time the prime interest rate is set (by the Federal Reserve), and of course, the individual factors of the applicant who is looking for the loan.

When I say loan, I mean it’s usually mortgage loans we are talking about when we’re talking about the prime interest rate, since these are typically the largest loans offered by banks aside from business and corporate loans and lines of credit. The prime rates as set by the Fed are adjusted on a monthly basis, usually fluctuating by fractions of a point within the interim of the months.

The highest the prime interest rate, which is the highest interest rate set by a sampling of about 75% of the banks in the US for corporate loans, has been in the past 20 years is about eleven and a half percent, which doesn’t sound like an astronomical amount, but when you work out the numbers over several years of the loan’s life, you’re paying a huge amount of interest over the long haul.

Heck, even when I look at my good interest rate that I got on my two home mortgage loand, one for the downpayment and one for the 75% of the principle that was left after that, I cringe when I see the “end result” of what we are going to pay over a thirty year mortage in interest. Let’s put it this way, it’s double what you pay for the actual principle on the home – youch! So just one percentage point can make an enormous difference on what you pay.

We of course are in a time of low interest rates right now, with the Fed recently lowering the interest rate to almost one percent, unheard of as of late, and because of the unprecedented economic turmoil that is occurring in our economy today. Let’s clarify something about the actual meaning of what the prime interest rate means in today’s banking industry. It used to mean that this was the rate commercial banks would offer their preferred customers who had the best credit ratings.

However, it has morphed into more of a meaning that expresses what commercial banks lend to their large, corporate customers, rates wise. In other words, it’s the interest rate that large commercial customers can get from lenders, but it also can still indicate what individual, non-corporate customers may be eligible to get as well. It can also refer to the interest rates to which banks loan money to eachother.

What does all this prime rate business mean to you? Well, the better the prime interest rate is, the more likely you are to benefit from it when you go to get a loan, whether it’s a small business loan, a home loan, or a loan for larger projects that you need to secure – even a car loan. You will benefit the most however, from a lower prime interest rate, if you have good credit. The better your credit score is (FICO score), the better your likelihood of getting the good rate from a bank is.

Because you have better credit, banks don’t charge you more points on your interest, because they look at you as a better loan risk. You are not charged additional interest for the simple fact that you may not pay back your loan, in other words. The more you hear about the subprime fiasco that’s been going on, the more you have probably realized that the reason these banks are in trouble is that they have charged those with subprime, or poor credit, higher interest rates because they are a higher no-pay risk, and they are charged higher points because of it.

Of course, a lot of these types of loans are being closely scrutinized now as being predatory and the lending practices will most likely have to be dramatically altered, especially when it comes to the subprime market because they are essentially at their heart, a discriminatory form of lending the benefits the banks a lot more than the customers, and this can be seen as them taking advantage of a lower income family’s desire to own a home.

It’s really a double edged sword, because of course it’s a capitalistic society and you want businesses (big banks) to have incentives to stay in business, because of course that is for the good of the whole economy, but at the same time, you don’t want them to profit solely at the expense of hardworking Americans. The prime interest rate helps to set that off a bit since it’s lessens bank’s profits.