Prime Rate Lending
Lending to highly creditworthy borrowers at or near the prime rate benchmark.
What is Prime Rate Lending?
Prime rate lending refers to the practice of extending credit to the most creditworthy borrowers at interest rates tied to or near the prime rate—the benchmark interest rate that major U.S. commercial banks charge their most qualified corporate customers. The prime rate is closely tied to the federal funds rate set by the Federal Reserve; most banks set the prime rate at 3 percentage points above the fed funds rate. Consumer products such as credit cards, HELOCs, and certain personal loans often use the prime rate as a base, expressed as 'prime plus' a margin (e.g., prime + 2.5%). Borrowers with excellent credit may qualify for rates at or near prime, while less creditworthy borrowers pay higher spreads above prime or are directed to subprime lending products.
Example
When the Federal Reserve raised the federal funds rate to 5.25–5.50% in 2023, the prime rate moved to 8.50%. A borrower with excellent credit holding a HELOC at prime + 0.5% saw their variable rate rise to 9.00%, directly illustrating how the prime rate transmission mechanism affects consumer borrowing costs.
Source: Federal Reserve — Prime Rate