What does the prime rate refer to?

The prime rate refers specifically to the interest rate that banks charge their most creditworthy and low-risk customers for short-term loans. This rate is significant because it serves as a benchmark for various types of loans and credit products, influencing interest rates across the economy. When banks set their prime rate, it usually reflects the prevailing economic conditions and the Federal Reserve's short-term interest rate policies.

It's important to note that the prime rate tends to be lower than the rates charged to less creditworthy borrowers, making it a preferred rate for businesses and individuals with strong credit histories. Thus, the prime rate is a crucial indicator of the lending environment, affecting everything from personal loans to credit card rates.