How a LIBOR-based loan can become cheaper than a prime-based loan as interest rates fall.
In August, a bank converted a dealer's floorplan loan from a rate of prime minus a half-point to the six-month LIBOR rate* plus 2.25 points. The result in each case was 8 percent. This is how the dealer's floorplan rate dropped between August and early November:
Aug. Sept. Oct. Nov.**
Prime - 0.5 8.00% 8.00% 7.75% 7.50%
LIBOR + 2.25 8.00% 7.81% 7.46% 7.23%
*Banks offer LIBOR with various maturities, such as one month, three months and six months.
**Rates were last updated Nov. 2, 1998. Rates are monthly averages.
Source: Kuhlmann Commercial Capital