What is the Importance of Prime Rate?

Published: 23rd December 2009
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Prime rate also known as prime loan rate is the percentage of interest charged by the nation's banking system. This rate is used and applied by many financial institutions. They charge interest on sort-term loan according to this rate. This rate creates an unequaled competitiveness in markets and even allows profitability. It even helps the consumers to differentiate between products.
This rate was determined by the top 30 large banks of the nation if we are talking about United States. The rate changed when 23 of these banks altered their interest rates. The journal then published a new rate on the basis of these changes. Since 2008 only 10 banks are involved in determination of this rate. The rate is now updated when 7 of these banks change their interest rates.
Different kinds of loans such as consumer loans are now lend on these rates. Here the margin is drawn due to the risk involved while lending some money in the form of loan to someone. Other products such as Certificate of Deposit are priced on this rate as they depend on time as a changing factor.
This rate is very important. This rate is not strictly imposed by law. Any loan can be given or taken at a lower rate than this rate. Customers are given these loans to increase business. A customer with a good credit rating can easily attain these loans.
The rate worth is a constant mark. American financial market refers to this rate as the base interest rate. This is even named as, Federal Funds Target Rate. It is placed and imposed by the Federal Reserve. The members of Federal Reserve form a committee which is called FOMC.
The committee meets within a span of six weeks to vote on the change of the Prime rate consider different trends and situations. This rate influences the WSJ rate. After it has been voted then its real effects are felt.
This committee monitors the inflation rate and tries to gain stability even if the economy is in the growth stage. These are the people who look after the US job market. They make the job market sustainable and a place where investments can be made comfortably.
Student loans are charged on this rate and even altered when the rate alters. The changes in prime rate even lead to the changes in interest rates of consumer loans or credit cards. So, in any case, important of prime rate cannot be overlooked at all.Fonds and Gold

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