The premium rate, preferential interest rate or prime rate is an interest class used as a reference in multiple commercial operations. It is called the premium rate, interest rate minimum charge a financial institution in a credit operation to its customers.
Origin of the Prime Rate
The premium rate originates from the United States. After the stock market crash and the great economic depression 30s. At that time there was a sharp drop in the demand for credit. This brought the banks to a high competition, which finally resulted in an agreement to mark a minimum interest in credit operations. Known as the premium rate or prime rate.
Use of the premium rate today
Currently, the prime rate is used by banks in the United States of America. The premium rate is applied to those operations that are considered lower risk. It is therefore reserved for the most solvent clients. It is used in the credit operations of large corporations with which there is greater financial security. Those in which there is the least credit risk and high chances of credit recovery.
How does the premium rate work?
The prime rate varies depending on the supply of credit and the demand for finance. To carry out its calculation, an average is carried out, based on a sample of the rates charged to the most solvent clients by the most important financial institutions. The premium rate is highly influenced by the general value of interest rates. In addition, it also varies depending on the type of loan. Those with the highest amount being those with the lowest rate.