Prime Rate
Definition
The interest rate that commercial banks charge their most creditworthy customers, serving as a benchmark for many consumer and business loan rates.
The prime rate is the base interest rate that banks offer to their most financially stable customers, typically large corporations. It serves as the foundation for many consumer lending products, including credit cards, HELOCs, adjustable-rate mortgages, and small business loans.
The prime rate is directly influenced by the Federal Reserve's federal funds rate. When the Fed raises or lowers the federal funds rate, banks typically adjust the prime rate by the same amount. The prime rate is usually about 3 percentage points above the federal funds rate.
Consumer loan rates are often expressed as prime plus a margin. For example, a credit card might charge prime plus 14%, meaning if the prime rate is 8.5%, your rate would be 22.5%. Understanding the prime rate helps you anticipate how changes in Fed policy will affect your borrowing costs.
Related Calculators
Related Terms
Interest Rate
financeThe percentage charged by a lender on borrowed money or paid to a saver on deposited funds, expressed as an annual percentage.
Variable Rate
financeAn interest rate on a loan or investment that changes periodically based on market conditions or a benchmark index.
Floating Rate
financeAn interest rate that fluctuates periodically based on a benchmark rate, causing payment amounts to change over time.
Inflation
financeThe rate at which the general level of prices for goods and services rises over time, eroding the purchasing power of money.
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