2017-04-05 00:00:00Borrowing and LoansEnglishLearn about the prime rate, and review how this rate may affect variable interest loans. Compare the prime rate to the overnight rate.https://quickbooks.intuit.com/ca/resources/ca_qrc/uploads/2017/06/Prime-Rate-Affects-The-Cost-Of-Borrowing.jpgWhat Is the Prime Rate?

What Is the Prime Rate?

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The prime rate is the lowest rate at which anyone can borrow money commercially. For example, if the prime rate is 3.1%, that is the lowest interest rate available on bank loans. In many cases, loans use variable interest rates that consist of the prime rate plus a certain number of percentage points. To explain, imagine you take out a business loan with a rate of 5% plus prime. If the prime rate is 2.8%, your interest rate is 7.8%. If the prime rate changes to 3%, your loan’s interest rate changes to 8%. This is a common way to structure interest for personal loans and business loans. The prime rate is based on the overnight rate, which is the rate banks charge each other when borrowing funds overnight. The Bank of Canada, the nation’s central bank, sets the overnight rate eight times per year. In response to these shifts, commercial banks set their prime rates. The prime rate is always higher than the overnight rate. For example, in February 2017, the overnight rate is 0.5%, while the prime rate is 2.7%. It’s important to understand prime rates when you’re taking out business loans. However, these rates are just one part of the process you need to understand while searching for the right funding for your small business.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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