One more about Prime Rate

Prime rate, or Prime Lending Rate, is a term applied in many countries to a reference interest rate used by banks.

The prime rate, as reported by the Wall Street Journal’s bank survey, is among the most widely used benchmark in setting home equity lines of credit and credit card rates.

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The term originally indicated the rate of interest at which banks lent to favored customers, i.e., those with high credibility, though this is no longer always the case.

Base rate that banks use in pricing commercial loans to their best and most creditworthy customers.

The lowest rate of interest on bank loans at a given time and place, offered to preferred borrowers.

Bankrate tracks and updates weekly the major indexes used by the banking industry, including those used as benchmarks for variable-rate credit cards, home equity lines of credit and adjustable mortgages.

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It is in turn based on the fed funds rate, which is set by the Federal Reserve.

The Journal surveys the 30 largest banks, and when three-quarters of them change, the Journal changes its rate, effective on the day the Journal publishes the new rate.

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In the US, the prime rate runs approximately 300 basis points above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements.

Many credit cards and home equity lines of credit with variable interest rates have their rate specified as the prime rate plus a fixed value commonly called the spread.

The most commonly recognized prime rate index is the Wall Street Journal Prime Rate , published in the Wall Street Journal.

The prime rate is the underlying index for most credit cards, home equity loans and lines of credit, auto loans, and personal loans.

The prime rate is an important index used by banks to set rates on many consumer loan products, such as credit cards or auto loans.

Default risk is the main determiner of the interest rate a bank will charge a borrower.

The prime rate will move up or down in lock step with changes by the Federal Reserve Board.

Many consumer loans, such as home equity, automobile, mortgage, and credit card loans, are tied to the prime rate.

The Prime Rate is used often as an index in calculating rate changes to adjustable rate mortgages and other variable rate short term loans.

The prime rate varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with great frequency.

* To see the definition of overnight averages click here.

Historically, in North American banking, the prime rate was the interest rate although this is no longer the case.

Unlike other indexed rates, the prime rate does not change on a regular basis; rather, it changes whenever banks need to alter the rates at which borrowers obtain funds.

In general, the prime rate runs approximately 300 basis points above the federal funds rate, the interest rate that banks charge to each other for overnight loans made to fulfill reserve funding requirements.

Dictionary of Finance and Investment Terms.

When 23 out of 30 of the United States’ largest banks change their prime rate, the WSJ prints a composite prime rate change.

Changes in the fed funds rate have far-reaching effects by influencing the borrowing cost of banks in the overnight lending market, and subsequently the returns offered on bank deposit products such as certificates of deposit, savings accounts, and money market accounts.

For example, a Blue Chip company may borrow at a prime rate of 5%, but a less-well-established small business may borrow from the same bank at prime plus 2, or 7%.

The COFI is a widely used benchmark for adjustable-rate mortgages.