Prime rate, or prime lending rate, is the interest rate commercial banks charge on loans to preferred borrowers. The prime interest rate is lower than the interest rates charged to less creditworthy borrowers. Commercial banks can charge lower rates to preferred (prime) borrowers – usually corporate customers – because these borrowers are less likely to default and the loans are considered safer. The US Prime Rate dates back to 1929.
The US Prime Rate is derived from the federal funds rate, which is set by the Federal Reserve Bank. The prime lending rate is usually set 300 basis points above the federal funds rate. For example, if the federal funds rate is 2%, the prime interest rate would be 5%. The prime rate is typically uniform across the commercial banking industry, but some banks may charge their best customers more or less than the official prime lending rate.
The prime interest rate is also used as a reference point for other interest rates. Less creditworthy customers can borrow at a rate equal to the prime rate plus a certain number of percentage points, depending on the borrower’s creditworthiness. Several types of consumer loans, such as home equity, car, mortgage, and credit card loans are often linked to the prime interest rate. This rate is also considered a lagging economic indicator.
The US Prime Rate is published in the Wall Street Journal, and is therefore often referred to as the Wall Street Journal Prime Rate, WSJ Prime Rate, or the WSJ Prime Lending Rate.
According to the Wall Street Journal, the prime rate is “the base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks.” The Wall Street Journal only changes their published Prime Lending Rate when 23 out of 30 of the largest banks in the US change their prime interest rates.
For the Wall Street Journal Prime Lending Rate history, go to: wsjprimerate.us
To see this rate today, as well as other rates, go to: bloomberg.com
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