Definition

In North American banking, the prime rate is the interest rate charged by lenders to borrowers who they consider most creditworthy. It varies little among banks, and adjustments are generally made by banks at the same time, although this does not happen with great frequency.

Source

In general, the prime rate is 3 percent above the Federal Funds Rate, the interest rate banks are forced (by the Federal Reserve) to charge to each other.

The most commonly recognized prime rate index is the Wall Street Journal Prime Rate (WSJ Prime Rate), published in the Wall Street Journal. 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. The WSJ defines the prime rate as "The base rate on corporate loans posted by at least 75% of the nation's 30 largest banks." It has been speculated though that this is no longer the real definition, (and that the prime rate is simply the fed funds target rate + 3) because most corporate loans are indexed to LIBOR.

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

Uses

The Prime Rate is used often in calculating mortgages and other variable rate loans. It is used in the calculation of some private student loans.

External link

• Money Cafe Prime Rate including historical data
• Prime Rate Changes History: Dates and Rates