What is a Prime Rate?
Prime rate is the short-term interest rate charged by a lender to customers who are the least likely to default on their loans. The most credit-worthy customers receive the best or lowest rate that the lender would offer any of its customers. Each lending institution sets its own prime rate. The rate is almost always the same among major banks. Adjustments to the rate are made by banks at the same time, but the rate does not adjust on any regular basis.
The prime rate is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate, a short-term rate objective or target rate of the Federal Reserve Board. The term prime rate may also refer to the national prime rate or the WSJ (Wall Street Journal) prime rate. This is an average posted by the newspaper based on polls of the top 10 banks in the United States.
This posted rate has become an index for many types of loans. Lenders use the index as their base rate, and then add a margin (profit) based primarily on the amount of risk associated with a loan. This index – often used for consumer loans, like auto loans, home improvement loans and credit cards – is a popular base rate used for home equity lines of credit.