What is the prime rate?

The prime rate is the interest rate that commercial banks charge their most creditworthy customers for unsecured loans. This rate is typically reserved for borrowers with strong credit profiles, given that they pose a lower risk to the lender. As a benchmark, the prime rate influences various types of loans across the economy, including some consumer loans and credit products.

The significance of the prime rate lies in its use as a reference point for many other interest rates, which can vary based on the borrower's creditworthiness and the nature of the loan. Generally, the prime rate is higher than the federal funds rate but lower than rates for riskier borrowers, making it a key indicator in the financial system.

In contrast, the other options present different types of rates that are not directly related to the prime rate. Home mortgage rates are typically based on various factors, including the market and individual borrower conditions. The rate for overnight loans between banks is known as the interbank lending rate or the federal funds rate, which caters specifically to financial institutions and reflects a different aspect of lending. The discount rate represents the interest rate the Federal Reserve charges member banks for short-term loans and is also distinct from the prime rate as it concerns a broader monetary policy tool rather than a benchmark rate for