What is the Prime Rate?

The prime interest rate, prime lending rate, or prime overdraft rate, is a reference interest rate commercial banks use when issuing variable interest rate loans to their customers.
Prime interest rate

When you borrow money from a bank, the interest rate that you will be charged by the bank, is usually specified in terms of the prime interest rate.

E.g., if you buy a car on credit, your loan agreement may specify that you will be charged an interest rate of “prime plus one”. This means that while have you the loan, you will be charged an interest rate equal to the prime interest rate at that time, plus 1%.

The prime interest rate can go up and down over time, usually in correlation with the repo rate. When the prime rate changes, the interest rate banks charge on loans to their clients also change (except for fixed interest rate loans).

When granting higher risk loans, a bank will charge a higher interest rate (e.g. prime plus three), while for lower risk loans the bank will charge a lower interest rate (e.g. prime minus two).

Historically the prime interest rate was the rate of interest at which banks lent to favored (low risk) customers, i.e., those with high credibility. However, this is no longer the case, since it is now possible to get loans from banks at below the prime interest rate.

This definition is part of the Dictionary of Financial Terms. If you want to receive a notice every time a new definition is published, you can subscribe to Liberta.

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  1. J Malherbe

    Thanks for a great site – very helpful, clear explanations for a finance dummy like me. Just a tip on language: affect = have an impact on; effect = bring about; lend = give x to someone for a short while, borrow = take x from someone for a short while (cf. the repo rate article).

  2. Francois Viljoen

    Thanks for pointing out the errors J if only my English was as good as my math!!

  3. L Vena

    thanx so much for the assistance:)

  4. matthew

    My understanding is that the prime rate is quoted NACM – am I correct?

  5. Francois Viljoen

    @matthew

    What is NACM?

  6. matthew

    NACM stands for Nominal Annual Compounded Monthly. It indicates the number of times a nominal rate is compounded in an annual period.

  7. Francois Viljoen

    @matthew

    The prime rate is just a nominal reference rate; it does not include any information about how the interest is accrued.

    The way the interest is compounded is determined entirely by the agreement between the lender and the borrower. For most people this means the small print in their loan agreements.

    Most of the loans granted by South African banks accrue interest daily.

  8. matthew

    Thank you Francois.

  9. Gavin

    So if you get a rate of 8.4% which i think is prime minus 0.6%…is that considered a good rate?

  10. LINDIWE MAHLANGU

    hello…how does the recent decrease in the repo rate affect an investment/saving…if one wants 2invest a lump sum…let say R35 000 for 4years which institution is best to invest/save with…bank/company like old mutual….is there a specific date that one should invest during,considering the economy,if so when….what about inflation? current,future is it save 2invest now…what else do 1 have 2consider when wanting 2invest

  11. Francois Viljoen

    @Lindiwe The REPO rate is only one of many things to consider when you’re making a short-term (less than 10 years) investment. I suggest you speak to a financial advisor.

  12. freedom giliana

    what is the economic growth rate of our country(south africa)?

  13. Anurag

    IS Prime rate and Interest rate are same..?

  14. Francois Viljoen

    @Anurag

    http://liberta.co.za/blog/what-is-interest/

  15. Herman

    Do you have a formula for calculating the rate of return on investment affected by the changes in Prime Rate? Investment for example of 100 return of 3 at prime rate of 8.5% what would it be at 8.75%, 9.00%, 9.25%.

  16. florence musengi

    very informative interesting reading

  17. Elelwani Clinton Nesengani

    thank you very much Viljoen

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