Q:

Why is it important to be knowledgeable about prime lending rates?

A:

Quick Answer

Since the prime rate is what commercial banks charge credit-worthy customers, retail customers need to understand some of the basics behind the rate, explains Investopedia. The prime rate also affects interest rates on mortgages, personal loans and small business loans.

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Full Answer

Banks also charge their most credit-worthy borrowers the prime interest rate on credit cards and automobile loans, according to Bankrate. However, the prime interest rate has little direct impact on mortgage loans with fixed interest rates. The prime rate instead directly affects home equity lines of credit, since they are similar to credit cards. The prime rate does have an indirect impact on the interest rate banks charge borrowers on their mortgages, especially adjustable-rate mortgages, states SF Gate Home Guides.

The prime rate is not a law that requires banks to charge a specific interest rate. Banks use the prime rate as an index to determine how much they charge their customers, notes FedPrimeRate.com The prime rate lays a foundation for banks to set rates on short- and long-term retail loan products. Consumers with knowledge of the prime rate and how it works can compare rates with other banks offering similar retail loan products. The prime rate is an efficient way for consumers to determine what type of interest rates they can expect to pay if they maintain good credit scores.

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