Sunday, April 1, 2012
Today, I got a call from a good friend who was asking for benchmark lending rate charged from bank. He was looking to finance his home loan and was confused with these terms. I thought I should write a post on this topic clarifying few of these complex terms.
Prime Interest Rate
The bank minimum charges prime interest rates for any lending, mainly to its prime (trustworthy) customers. There rates are bare minimum, on top of which it lays additional interest rate based upon default risk/trustworthiness of a customer. But do not confuse this with the benchmark prime interest rate.
Benchmark lending
Benchmark lending rates are used to determine prime interest or lending rate. One common benchmark for PLRs is LIBOR. LIBOR stands for London Interbank Offered Rate. This is the rate at which banks in London loan each other funds in the money market. In India, we have MIBOR (Mumbai Interbank Offered Rate). Below is the screenshot of LIBOR 3 month over a period of time.
How Lending Rate is determined
Its majorly prevailing markes conditions. Economy, inflation, deflation, repo rate, reverse repo rate, money supply, exchange rates etc are few factors that determine these rates.
Sunday, April 1, 2012 0
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