Prime rate

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Prime rate or prime lending rate is a term applied in many countries to reference an interest rate used by banks. The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with good credit, though this is no longer always the case. Some variable interest rates may be expressed as a percentage above or below prime rate.

Use in different banking systems[edit]

United States and Canada[edit]

Historically, in North American banking, the prime rate was the actual interest rate, although this is no longer the case. The prime rate varies little among banks and adjustments are generally made by banks at the same time, although this does not happen with frequency. The prime rate is currently 3.25% in the United States[1] and 3.00% in Canada.[2]

Historical chart of the effective Federal Funds Rate

In the U.S., the prime rate runs approximately 300 basis points (or 3 percentage points) above the federal funds rate, the interest rate that banks charge each other for overnight loans made to fulfill reserve funding requirements. The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers, as is LIBOR, the London Interbank Offered Rate. The Federal Open Market Committee (FOMC) meets eight times per year to set a target for the federal funds rate.

Prior to December 17, 2008, the Wall Street Journal followed a policy of changing its published prime rate when 23 out of 30 of the United States' largest banks changed their prime rates. Recognizing that fewer, larger banks now control most banking assets, the Journal now publishes a rate reflecting the base rate posted by at least 70% of the top ten banks by assets.

Uses[edit]

The prime rate is used often as an index in calculating rate changes to adjustable rate mortgages (ARM) and other variable rate short term loans. It is used in the calculation of some private student loans. Many credit cards and home equity lines of credit with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread or margin.

See also[edit]

References[edit]

  1. ^ According to data published by The Wall Street Journal Online and the Federal Reserve Board of Governors. "Federal Reserve Statistical Data". Federal Reserve. 
  2. ^ According to data published by Bank of Canada. "Daily Digest- Rates and Statistics- Bank of Canada". Bank of Canada. 

External links[edit]