Prime lending rates are interest rates that banks give to their most credit-worthy customers. These customers are usually large corporations and show little, if any, risk of defaulting.
Because of the lower risk of defaulting, the banks are able to provide these customers with a much lower rate than it could otherwise give to customers with a greater risk of defaulting. The specific amount of the prime lending rate is usually determined by the federal funds rate. The federal funds rate is the overnight rate at which banks lend to one another.
The prime lending rate can also impact retail customers, as it has a direct impact on the lending rates for loans, such as mortgages, personal loans and small business loans.