What is the prime interest rate?

(Shutterstock)
(Shutterstock)

A Fin24 user wants to know what the prime interest rate is. She writes:

What is the prime interest rate?

Jacques du Toit, Absa's property analyst, responds:

The prime overdraft rate or simply prime rate is the lowest rate at which a clearing bank will lend to its clients on overdraft.

Banks are free to set the prime rate at their own discretion, but in practice competition usually forces different banks to set the same prime rate.

The rate at which ordinary clients are charged on overdraft balances can vary from client to client and from bank to bank. Usually this is significantly higher than the prime rate.

A clearing bank is a commercial bank that is part of a network of banks that can clear transactions for its clients regardless of whether or not the transaction originates from the same commercial bank.

Clearing a transaction means processing it so that funds are deducted from the payer's account and put into the payee's account.

Currently the prime interest rate is at 9.25%.

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