Definition of Prime Interest Rate
In the United States, the interest rates for monies lent depend on a number of factors. Everything from income, credit history, where one seeks to borrow from and even the purpose for borrowing money all play a key role in determining the interest rate assigned. Amongst all of these variable sits one constant, the prime interest rate. The prime rate is publicly listed, universally known and is the basis for determining the rates on a host of loan programs and credit offerings.
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Features
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The prime interest rate is, almost always, set and adjusted by banks throughout the United States at the same time and is based upon the Federal Funds Rate (which is the rate at which the banks lend money to other banks). Most of the time, when the Federal Funds Rate goes up or down, the prime rate follows suit by the same percentage.
Function
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The prime interest rate is used by banks in the United States as a means of setting the baseline rate that can be offered to their most credit worthy customers. It is used in determining the rates in everything from home loans to car loans to lines of credit. The fluctuation of the rate also affects people with less than perfect credit as rate adjustments for poor credit are added on top of the prime rate.
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Significance
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The prime interest rate is printed daily in the "Wall Street Journal" and provides people around the country with an idea of where lending rates are, in general, at any given time.
Time Frame
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The Federal Reserve meets 8 times each year to consider, among other things, whether to change the Federal Funds Rate, which would by extension also change the prime rate accordingly.
History
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The Prime Rate has been as low at 1.75 percent in the 1940s and got up to as high as 21.5 percent in 1980. Since it was introduced in 1947, the median rate is 8.75 percent.
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