Prime Rate Definition
The U.S. Prime Rate is a commonly used, short-term interest rate
in the banking system of the United States. All types of American
lending institutions (traditional banks, credit unions, thrifts,
etc.) use the U.S. Prime Rate as an index or foundation rate for
pricing various short- and medium-term loan products. The Prime
Rate is consistent because banks want to offer businesses and consumers
loan products that are both profitable and competitive. A consistent
U.S. Prime Rate also makes it easier and more efficient for individuals
and businesses to compare similar loan products offered by competing
Each U.S. state does not have its own individual Prime Rate, so
the "New York Prime Rate" or the "California Prime
Rate" are in fact the same as the United States Prime Rate.
Providers of consumer and commercial loan products often use the
U.S. Prime Interest Rate as their base lending rate, then add a
margin (profit) based primarily on the amount of risk associated
with a loan. Moreover, some financial institutions use Prime as
an index for pricing certain time-deposit products like variable-rate
Certificates of Deposit.
It's important to note that the Prime Rate is an index, not a
law. Consumers and business owners can sometimes find a loan or
credit card with an interest rate that is below the current Prime
Lending Rate. Lenders will sometimes offer below-Prime-Rate loans
to highly qualified customers as a way of generating business. Furthermore,
below-Prime-Rate loans are relatively common when the loan product
in question is secured, as is the case with mortgages,
home equity loans, home equity lines of credit and car loans.
Every U.S. bank sets its own Prime Rate. However, the Prime Rate
is invariably tied to America's cardinal, benchmark interest rate:
the Federal Funds Target Rate (or Fed Funds Target Rate [FFTR].)
The FFTR is set by a committee within the Federal Reserve system
called The Federal Open Market Committee (FOMC).
The FOMC usually meets every six weeks, and it is at these meetings
that the FOMC votes on whether or not to make changes to the FFTR.
When the FFTR changes, the United States (Fed) Prime Rate will also
change. If the FOMC votes to make no changes to the FFTR, then the
U.S. Prime Rate will also remain unchanged.
Since the second quarter of 1994, a rule of thumb for the U.S.
Prime Rate has been:
U.S. Prime Rate = (The Fed
Funds Target Rate + 3)
The FOMC's primary objectives are to keep inflation
under control and maintain steady economic growth with maximum sustainable
employment within the United States.
The U.S. Prime Interest Rate is used by many banks to set rates
on many consumer loan products, such as student loans, home equity
lines of credit, car loans and credit cards. If you read or hear
about a change to the U.S. Prime Rate, then any loan product that
is tied to the Prime Rate will also change, like variable-rate credit
cards or certain adjustable-rate mortgages.
Click here for more
information about how
the U.S. Prime Rate works.
Click here to view a FlowChart
for the U.S. Prime Rate.
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U.S. Prime Rate FAQ.
The Current Fed Prime Rate is: 3.25%
(the last rate change -- a decrease of 100 basis
[1.00 percentage point] -- occurred on March 15, 2020)