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.