Prime rate definition

The prime rate is the interest percentage rate that commercial banks use as a benchmark from which they price loans to their customers. This rate is typically 3 percentage points (300 basis points) over the Federal Funds Rate.

The prime rate is often referred to as the rate banks charge their best customers (translation: lowest risk). With this in mind, higher risk customers, like many small business borrowers, pay what is called, "prime plus." For example, if the prime rate is 7%, a loan priced at prime plus 2 would be 9%.

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