Prime – Definition

Cite this article as:"Prime – Definition," in The Business Professor, updated September 14, 2019, last accessed July 8, 2020, https://thebusinessprofessor.com/lesson/prime-definition/.

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Prime Definition

Prime refers to a certain classification in the lending market, which involves rates, borrowers or holdings, regarded to have great quality. The classification is based on the loans offered to prime quality borrowers usually at considerably reduced interest rates.

A Little More on What is Prime

Prime is among the many market indicators widely used in the world of finance. Also, it is one of the main benchmarks for credit cards as well as mortgage rates. In other words, it is the basis under which banks adjust the rate of their loans. Prime is the interest rate that commercial banks charge those they consider to be their trustworthy customers.

It is important to note that the prime is not for everyone. Therefore, not everyone can qualify for a prime loan. Prime is only available for those customers whose chances of defaulting to repay are close to zero (trustworthy customers). For this reason, prime loans, according to commercial banks, have the lowest risk, and they can easily be sold in the secondary market.

Banks that lend prime loans categorize their potential borrowers into two: prime and subprime. In general, it is quite easy for a loan application to be approved when you are a prime borrower than when you are a subprime borrower.

About Prime borrowers

Prime loan borrowers refer to those borrowers whose chances of defaulting on loan obligations are either very low or zero. A credit score is the most viable tool used to determine prime borrowers. Typically, a credit score for prime borrowers is above 620 when the FICO scale of 300 to 850 methodologies is applied.

Basically, the prime borrower’s credit cutoff can be higher. However, this is majorly dependent on the lender as well as the model’s credit score the lender is using. Generally, for one to be considered a prime borrower, his or her credit score should be between 700s and 800s.

Note that there are also other variables in place that lenders use to gauge whether or not someone is eligible for a prime loan. A lender may, for example, put into consideration the debt of the borrower’s gainst income as well as the overall credit profile. Therefore, this means that borrowers whose credit profile is of high quality or average in most cases may qualify for prime loans.

Though higher credit score makes prime borrowers stand a high chance of their loan application being approved, it is, however, not a guarantee. The reason is that lenders also put into consideration other factors before they decide whether or not to grant you a prime loan. In most cases, lenders have their own criteria for prime loan qualifications. If you don’t meet their qualifications, you may be denied a prime loan even if you have an excellent credit rate score.

Generally, prime borrowers are the most sought after customers by the lenders. For this reason, they are usually more selective when it comes to the credit they acquire. Prime borrowers, in most cases, look forward to the lowest interest rate from the lenders. Also, due to their high credit score status, they always enjoy a large amount of approval from financial institutions.

How does one become a Prime Borrower?

To become a prime borrower, you are required to have the following:

  • Fewer accounts
  • Fewer credit inquiries
  • Fewer new accounts
  • Lower credit utilization
  • Few or not collection accounts
  • Recent delinquencies

Generally, for you to be considered a prime borrower, you must work towards improving your credit rating. You will be expected to control the number of accounts you open to the minimum.

Also, regarding your available credit, you are only required to use a portion of it as well as ensure the timely payment of your account. Settle any other past debt balances so that it does not work against you.

Further, do not allow any of your accounts to be forwarded to collection agencies. Note that even accounts such as medical bills or utility may end up to the credit bureaus. When your bills get to the credit bureaus, it is likely to affect your credit report if not paid.

What Benefits does one get for being a Prime Borrower?

The following are some of the things a prime borrower stand to benefit from:

  • Prime borrowers are considered to be a viable loan applicant
  • Their loans are easily approved and with the lowest rates
  • They can easily access higher loan amounts with an affordable repayment plan
  • Prime borrowers are granted more power to negotiate loan terms

Subprime Borrowers 

Those borrowers considered not to be prime fall under a subprime borrower. These kinds of borrowers, their credit scores are usually not that prime, but at the same time not that low.

About Prime Loans

For risk management purposes, lenders usually categorize loans they issue. Prime loans are given by traditional financial institutions. The reason is that they are less risky to lenders.

Also, such banks’ balance sheets have the capacity to manage products with high credit products. Generally, prime loans stand out to be one of the profitable loans in the loan market. For this reason, they are easily sold in the secondary loan market

How a Non-qualifying prime borrower can qualify for a Loan

There are possibilities of accessing a loan, even without being a prime borrower. However, the terms may be slightly harsh. For instance, a lender may approve your loan application either with a lower credit limit or higher interest rate. In some instances, the two conditions may all be applied by the lender when approving your loan.

Also, a non-qualifying prime borrower can get his or her prime loan approved through a consigner. A consigner is a person who agrees to acquire a credit on your behalf. Another way may be to create a good credit rating.

References for “Prime

https://www.investopedia.com/terms/p/prime.asp

https://financial-dictionary.thefreedictionary.com/prime

https://investinganswers.com/dictionary/p/prime

https://www.bankrate.com › Glossary › P

https://www.hedgeweek.com/2012/12/11/177917/challenges-prime-finance

www.businessdictionary.com/definition/prime-rate.html

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