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What is the Prime Rate?

Nicole Madison
By
Updated Jan 20, 2024
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The prime rate is the interest rate banks or lenders charge their most preferred and credit-worthy customers. Often, loan products like personal and automobile loans use the prime rate as a base rate. Credit cards and certain types of commercial financing may use the prime rate as a base as well. Typically, personal loan and credit card customers are charged interest rates that are at least a few points higher than the prime rate.

As the prime rate is tied to credit, interest rates increase as creditworthiness declines. The rate also fluctuates depending on economic conditions. Furthermore, the prime rate may vary among different banks.

Each bank or financial institution quotes its own prime rate. Often, financial institutions choose to offer prime rates that have been set by large commercial banking institutions. In the United States, some financial institutions may look to the Wall Street Journal for the average prime rate of the more prominent commercial banking institutions.

When banks give rates to their credit card customers, they often start with the prime rate and add a percentage. This percentage varies and reflects the bank’s perceived risk in offering the credit card account. The percentage added to the prime rate also includes a profit for the bank.

The prime rate is generally about three percent higher than the federal funds rate. The federal funds rate is the rate that banks charge when lending to each other. In turn, the federal funds rate is determined by the rate at which banking institutions borrow from the Federal Reserve. That rate is called the discount rate.

Those most likely to benefit from borrowing at the prime rate are large corporations. This is because banking institutions tend to believe that their large corporate clients are less likely to default on loans than other types of customers. When customers pose little risk to banking institutions, those institutions feel more comfortable lending to them and offering more attractive rates.

Sometimes, the term subprime is used in relation to loans and other financial products. Subprime financial products can consist of loans, credit cards, and lines of credit intended for those with low credit scores or individuals with scant credit histories. Individuals with blemished credit histories are not able to take advantage of the prime rate. These individuals are usually charged a higher or subprime rate because of the perceived risk to the lenders.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Nicole Madison
By Nicole Madison
Nicole Madison's love for learning inspires her work as a WiseGeek writer, where she focuses on topics like homeschooling, parenting, health, science, and business. Her passion for knowledge is evident in the well-researched and informative articles she authors. As a mother of four, Nicole balances work with quality family time activities such as reading, camping, and beach trips.
Discussion Comments
By Crispety — On Oct 25, 2010

SauteePan-I know that the interest prime rate is low, but not everyone can refinance. If for example, you owe more home on your home than it is worth, you will not be able to refinance your mortgage.

You should really have about 20% equity in the home in order to refinance. A lender will conduct an appraisal of your home and if you have less than 20% equity in your home, then the lender might require that you carry mortgage insurance which is about $2000 a year.

The private mortgage insurance expense along with the closing costs might not make the refinance worthwhile.

You really have to look at your situation in order to determine if this is the right route for you to take. The depressed market values for many homes make it difficult to refinance and take advantage of the historic prime rate.

By SauteePan — On Oct 25, 2010

Latte31-I have a home-equity line of credit at prime plus a quarter percentages. My rate currently is 3.5% which is sligthly above the prime interest rate at 3.25%.

My home-equity line of credit is a variable interest rate which is tied to the treasury prime rate.

Since this is not a loan that I intend to pay on forever, I decided to take my chances on a variable rate because the rates are so low.

Because these rates are so low, many people are refinancing their home mortgages to take advantage of the lending prime rate.

A 30 year fixed-rate mortgage is at about 4.4% average while a 15 year fixed rate mortgage is at about 3.70%. For up to date date on the interest prime rate you should go to the site Bankrate. There you will find not only the prime rate graph, but you will find the current rates on CD's and money market accounts as well.

By latte31 — On Oct 25, 2010

Cafe41-Usually the Federal Reserve will offer a prime rate increase of a quarter of a point at a time.

The historic primary rate is at all-time low in order to help the housing market.

The lower the prime rate the cheaper it is for people to borrow money and obtain a mortgages. However with tightening banking standards only those with exceptional credit are able to obtain mortgages.Usually those with credit scores of 720 are eligible.

By cafe41 — On Oct 25, 2010

The WSJ prime rate or the Wall Street Journal prime rate is the typical rate that banks charge their most credit worthy customers.

The prime rate is set by the Federal Reserve is the starting point for all lending. The Federal Reserve set interest rates quarterly and sets the prime lending rate.

All banks use this benchmark in order to determine the appropriate starting point for most lending. The current lending primary rate is 3.25%. The current prime rate trend has remained steady for the last two years.

Nicole Madison
Nicole Madison
Nicole Madison's love for learning inspires her work as a WiseGeek writer, where she focuses on topics like...
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