The interest rate banks charge their most creditworthy customers, or customers with the least risk of defaulting. In other words, the minimum rate a bank would be willing accept on an outstanding debt. Prime rates directly affect other lending rates, as the prime rate serves as a basis for determining interest rates for mortgages, business loans, and personal loans.
Prime rates are not determined by a government agency, and can vary across institutions. Although changes to the federal funds rate or other index may influence a change in a bank’s prime rate, it does not directly dictate a change. For example, J.P. Morgan is not required to raise its prime rate 0.25% with the Federal Reserve raising the federal funds rate by 0.25%.
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