It does seem rather strange that we would have to define and describe what a Prime Rate is, what it is worth mentioning quickly. Whatever the prime rate is at any particular time weighs on the entire market, businesses, and individuals like you living in Ohio who needs a loan for their small business or their family.

A prime rate is a reference note that banks use in pricing short maturity commercial loans to their best, or most creditworthy, customers. Commercial and industry loans are often priced at prime or prime plus a spread. You’ve often heard the term, “prime rate +1″, or “prime rate +2″, etc.

the prime rate is less important today in pricing bank loans to corporate borrower’s that have access to the capital markets. Starting in the 1970s, banks began pricing commercial loans at rates below the bank prime to their most creditworthy corporate customers. Many banks, however, still priced business loans under $1 million and loans to smaller borrower’s at spreads above the prime rate.

Alternatives to the bank prime rate are the lenders own cost of funds, and an index rate, such as the London Interbank offered rate (LIBOR). Although the prime rate is the definitive best rate for top-quality borrower’s, many banks maintain a two-tier pricing system where major corporations and even middle market firms are able to borrow at an even lower rate.

And you are probably wondering where the prime rate comes into play with families and individual borrowers who are financing a home or vehicle. Every loan on the market can be compared to the prime rate of course, but usually with loans such as vehicles and extras, are provided for borrowers at a rate of at least seven points above prime. If you have a really bad credit rating is possible to have a loan at a rate of 15 points above prime. It can get even uglier than that.

There are some business owners who borrow money on a corporate basis whether they be small businesses or large businesses and they can sometimes get their mortgage for their personal property at prime, a point below prime, or just a couple points above prime, but still better than what the average worker bee or employee gets their mortgage at.

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