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Prime Rate
What Is the Prime Rate?
The prime rate is the interest rate that banks charge their most creditworthy customers.
It serves as a benchmark for many variable-rate loans and credit cards.
When the prime rate changes, borrowing costs often change as well.
The prime rate closely follows the federal funds rate set by the Federal Reserve.
Why the Prime Rate Matters
Many loans are structured as:
Prime Rate + Margin
For example:
- Prime rate: 8%
- Margin: 3%
- Your rate: 11%
If the prime rate rises, your interest rate increases.
Prime rate impacts:
- Credit cards
- Home equity lines of credit (HELOCs)
- Adjustable-rate loans
Prime Rate vs. Federal Funds Rate
- Federal Funds Rate → Set by the Federal Reserve
- Prime Rate → Set by banks based on that benchmark
They move closely together but are not identical.
FAQs About the Prime Rate
Does prime affect fixed-rate mortgages?
No.
Who sets the prime rate?
Major banks establish it based on Fed policy.
Does prime change often?
It adjusts when the Federal Reserve changes rates.
Related Terms
