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What is Prime Rate: How it Works & Formula

February 13, 2018

The prime rate is the best interest rate that banks offer the most creditworthy borrowers. Average current prime rates are typically calculated by taking the federal funds rate and adding a 3% margin. Business owners with a strong track record of success and high credit score, known as “prime borrowers,” can qualify for the prime rate.

How the Prime Rate Works

Banks use the prime rate as a starting rate for various financing products, like credit cards, commercial mortgages, small business loans, auto loans, and home loans. Lenders will typically add a margin to the prime rate based on the amount of risk associated with a loan. This is why the best borrowers are called “prime borrowers,” because they qualify for the lowest rate offered by a lender.

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