Sunday, May 3, 2009

Bank Rates on loans

Bank rates tend to vary with the overall demand for credit as compared with the availability of loanable funds. When borrowers,such as business firms,need more outside funds to expand working or fixed capital in order to meet increased demand for their product or service,they may turn to any one of a number of sources of loanable funds,almost certainly including commercial banks. When the credit needs of a number of important borrowers tend to increase,the price of such credit,which is the interest rate,also tends to rise.
The prime rate The key interest rate in the whole interest rate structure pertaining to bank loans is that of the prime rate. The prime rate is the bank interest rate charged on very short-term loans to very large business borrowers with very high credit ratings. These include business firms that are often household words such as General Motors and General Electric. All other bank lending rates are scaled upward from the prime rate. Hence,whenever the prime rate moves upward or downward,all other bank interest rates tend to change in the same direction.

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