Prime Lending Rates
Introduction
The prime lending rate is the interest rate charged by banks to their most reliable and trustworthy customers based on their creditworthiness. This rate is mostly the same among all the prominent banks. This rate does not change too often however adjustments in the rate can be made from time to time. The Wall Street Journal surveys a number of large banks and publishes the consensus prime rate which is an average amount arrived at after studying the prime rates of the top major banks. When ¾ of the major banks change their rates the Journal also changes its rate and publishes the new one.
Influences on the prime lending rates
The prime lending rates are influenced by changes in the federal fund rates which are the fund reserves (a certain percentage of their customers money on which the bank cannot do transactions) maintained by the banks as a reserve limit. The federal discount rate and the federal fund rate are used to control the supply of funds. When these rates are high the prime lending rates increase and it becomes more expensive to borrow and vice versa. This actually helps to keep inflation under control.
Requirements to avail of this loan
To get a prime lending rate on your loan you need to have a good credit report with your bank. This can be done by reducing your debts and clearing up all the previous credit balances. One cannot avail of prime lending rates if one has a poor or bad credit because the risk of paying back also decreases and people with bad credit are generally discouraged from borrowing further.However after improving ones credit worthiness by keeping a clean credit history one can avail of low rates of interest when the prime lending rates are declared as low in the market. The credit industry uses credit scores to divide potential customers into prime and sub prime markets.
Conclusion
The federal fund rate is the primary tool used by the Federal Open market committee to influence the interest rates in the economy. Changes in the federal fund rates influence the borrowing costs of banks and consequently the returns offered on bank deposits. The prime lending rate is the deciding factor whether the demand for loans raise or fall in the economy.Generally a low prime lending rate is a good indication for the borrowers to take loans from banks provided they have a good credit balance with the bank and are one of their trustworthy customers. Similarly a high lending rate reduces demand for loan and people wait till the lending rates reduce to take loans.
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