What is the Prime Lending Rate?

The prime lending rate is the interest rate charged by lenders to borrowers who pose the lowest amount of risk. Lenders hedge risk based on credit scores and for those borrowers with a lower risk of default, lenders assess lower rates. Lenders are not required to charge the prime lending rate.   

The prime rate is considered a guideline and is taken as a level that most lenders charge their best customers. The rate fluctuates with the market. Although there is no set schedule for when to adjust the prime lending rate, changes usually occur in accordance with changes to the Federal Funds rate.

When applying for a mortgage, borrowers with the best credit history will receive the best terms on their home loans.  If a borrower does not have good credit, the assumption is that they will be more likely to default on the home loan and therefore presents a higher risk to the lender. Once the borrower begins to make payments on time and improves their credit score, they can refinance the mortgage to a level closer to the prime rate.