What is prime rate?

We all want prime, prime rib, prime rate you know the interest rate that is offered to the best and most credit worthy customers. Well that used to be the case with the Prime Interest Rate. 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

Currently the prime rate is 8.5% in the US and 6% in Canada. The rate is usually the same amongst major banks. Adjustments to the prime lending rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis.

The best way to look, at this is that the Prime Rate runs 300 basis points above the federal fund rage. The basis point is 0.01% and is often used in the basis of interest rates. The difference between 5.01% and 5% is .01 or a basis point.

The Federal Funds rate is the rate the banks charge each other for a loan so the banks can reach the required reserve amount.

The Fed In fact if you want to get very technical does not actually raise or lower rates. They control the monetary policy, which in turn affects the interest rate movement up or down.

Nonetheless, when the Fed raises or lowers the target for these two short term rates, Prime Rate almost always follows suit because of the change in the cost of money.

The most recognized prime rate index is the Wall Street Journal Prime Rate. Unlike other index rates, the prime rate does not change on a regular basis. Instead, it changes rates when the banks need to alter the rates of which borrowers obtain funds.

The Prime Rate has several uses:

• Calculating mortgage rates
• Calculating variable rate loans
• Calculating private student loans
• Credit cards use prime rate plus a fixed value

Looking at the changes in the prime rate since 1947 can show us the increases and decreases, but regardless the steady climb.

Date of Change Prime Rate
1-Dec-47 1.75
6-Aug-57 4.5
27-Jan-67 5.75
24-Oct-77 7.75
5-Oct-87 9.25
26-Mar-97 8.5
29-Jun-06 8.25
The base rates on many corporate loans are posted with at least 75% of the nation's 30 largest banks. These banks change their prime rate with the Wall Street Journal prime rate change.

The official prime rate, the "definitive best rate reference point," is set by the major banks, but many banks have a two-tiered system in which the most creditworthy companies can borrow at a rate even lower than the prime, and less creditworthy small businesses might borrow from the same bank at prime plus 2 percent.

The prime rate affects you because lenders use it as a jumping-off point for establishing the interest rate on many credit cards and consumer loans, such as automobile, home-equity and mortgage loans

Over the last 10 years, the prime rate has averaged approximately 7%.

Prime Rate is not directly correlated with mortgage rates but most compensating factors are. Therefore, when there is movement in the Prime Rate you will most likely see movement in current mortgage rates.

Changes in the prime rate affect the rates the rest of us pay for loans -- from home-equity credit lines to credit cards to loans for new cars. Rates on many home equity loans, for example, are based on "prime plus two," meaning the rate the borrower pays is two percentage points higher than the prime rate.

So, with this in mind the amount of interest we will pay on our loans, mortgages and other borrowed monies can be directly affected by the prime interest rate.