9/23/2022
When you're determined to improve your personal finances, you know you're going to have to deal with credit, rates, and different kinds of metrics. It may sound complex or boring, but once you internalize it, it's like keeping in mind the price of gasoline.
For that reason, we would like to show you several definitions, like the Prime Lending Rate, that we are going to talk about in this article.
What do we know about the Prime Rate?
The basic definition of the Prime Lending Rate is: the percentage that financial entities charge their most responsible clients. This means that entrepreneurs, investors and people who show the best credit score obtain this reference value.
The reason is very simple: they have shown discipline, punctuality and represent a minimum risk for the financial institution. On the other hand, it is the best rate available for someone looking for financing or another instrument in addition to the one offered to other banks.
In addition, the prime lending rate works as a reference for other interests. For example, when you apply for a credit card or a personal loan with one of the most important banks, the Prime Interest Rate could be the least that they will charge you.
Unlike fees or charges for services, it is a percentage that entities change uniformly, since the rise or fall of the Fed rates affects its modification.
Similarly, many institutions use the WSJ Prime Rate as a reference to establish this interest rate. This value is the one published by the Wall Street Journal, it is based on a survey of the 30 most important banks in the United States and it is usually readjusted every time at least 23 entities modify it. It is the most used indicator due to its frequency.
Importance of the Prime Lending Rate
Many people only worry about the health of their personal finances when something is wrong or something unexpected happens. We say this because carelessness and bad habits stem from a lack of knowledge about how a country's economic system works.
The Prime Rate is important because it conditions the financing interest that has the greatest impact on your assets.
Banks, credit unions and savings entities set interest above the Prime Rate to cover their biggest risks. Rates above Prime reduce the losses caused by unavoidable defaults.
In this category are financial products such as credit cards, adjustable rate mortgages, and interest-only mortgages.
As with other relevant indicators for the national economy, if the Prime rises, the monthly financing payments or installments also raises. For this reason, it is important to be attentive to what the Federal Reserve says regarding the modification of its indices. This information is valuable to know when it is better to invest, borrow or buy.
Likewise, the Prime Lending Rate has an impact on the liquidity of the financial markets. The fact that this indicator rises makes financing more expensive due to a slower economy and less liquidity. On the contrary, if this benchmark drops, companies have more opportunity to grow because loans are more accessible.
Who qualifies to obtain the Prime Rate?
In general, this rate is reserved for clients or businesses with an impeccable credit history and that are not banks. It is more common for a stable company or a corporation to get this benefit before a natural person.
The Prime Rate is not necessarily a fixed value for all financial entities, but rather a reference. Although the published percentage value, lenders or institutions may offer a lower rate to those who they consider to be their most qualified clients. It should not be considered as a mandatory minimum index for banking products.
For example, interest rates for credit cards are variable. When you request this instrument, the bank could tell you that the APR in question would be 19% (Prime + 13.5%). In this case, they are offering you the same rate that they would give anyone else because they are not considering you as one of their most important and highly valued clients.
The Prime Lending Rate is something that we must be aware of when we request some type of financing or personal loan. Depending on our relationship with the bank, we can obtain a more favorable proposal, which improves our personal finances. If you want to know more, be sure to consult our search engine.
Español: Tasa de Interés Preferencial (Prime Rate)