Prime Rate

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Prime Rate

The Prime Rate is an interest rate that mainstream commercial banks charge borrowers with strong credit ratings, such as big businesses or corporations that have a great track record. The prime rate is one of many “lagging indicators” which are directly affected by general changes in the economy. It is called the prime rate because it is the number one, or best rate offered, and any other rate is either below or above the prime rate. Borrowers strive to be offered the prime rate and often use the prime rate to make calculations before seeking a loan or mortgage.

In the United States the prime rate is generally adhered to and shared by all of the major banks, so any one bank will have the same prime rate. According to the Wall Street Journal the prime rate they print is "the base rate on corporate loans posted by at least 75% of the nation's 30 largest banks." The Wall Street Journal prime rate is the most commonly used and almost always the index referred to when somebody is talking about the prime rate.

The prime rate rarely changes unless there is major economic crisis, and if it’s warranted most banks change the prime rate at the same time. The prime rate also runs in correlation with the Federal Funds Rate, which is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions on overnight basis.

In real estate the prime rate is one of the main factors in setting an interest rate on Adjustable Rate Mortgages (mortgage loan that has a fluctuation interest rate). As opposed to fixed rate mortgages, adjustable rate mortgages change with the economy, so because the prime rate also changes with the economy it is a good index to monitor.