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A prime rate or prime lending rate is an
interest rate An interest rate is the amount of interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investm ...
used by banks, usually the interest rate at which banks lend to customers with good credit. Some variable interest rates may be expressed as a percentage above or below prime rate.


Use in different banking systems


United States and Canada

Historically, in North American
banking A bank is a financial institution Financial institutions, otherwise known as banking institutions, are corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), stat ...

banking
, the prime rate was the actual interest rate, although this is no longer the case. The prime rate varies little among banks and adjustments are generally made by banks at the same time, although this does not happen frequently. The current prime rate is 3.25% in the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...

United States
, while it is 2.45% in
Canada Canada is a country in the northern part of North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean, Atlantic to the Pacific Ocean, Pacific and northward into the Arctic Oce ...

Canada
. In the United States, the prime rate runs approximately 300
basis point A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is (a difference of) one hundredth of a percent or equivalently one percent of one percent or one ten thousandth. A very rarely used term, permyriad, means parts per te ...
s (or 3 percentage points) above the federal funds rate, which is the interest rate that banks charge each other for overnight loans made to fulfill reserve funding requirements. The Federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers, as is LIBOR, the
London Interbank Offered Rate The London Inter-Bank Offered Rate is an interest-rate average calculated from estimates submitted by the leading banks in London London is the capital city, capital and List of urban areas in the United Kingdom, largest city of England an ...
. The
Federal Open Market Committee The Federal Open Market Committee (FOMC), a committee within the Federal Reserve System The Federal Reserve System (also known as the Federal Reserve or simply the Fed) is the central bank A central bank, reserve bank, or monetary a ...
(FOMC) meets eight times per year to set a target for the federal funds rate. Prior to December 17, 2008, the ''
Wall Street Journal ''The Wall Street Journal'', also known as ''The Journal'', is an American business-focused, English-language international daily newspaper A newspaper is a periodical Periodical literature (also called a periodical publication or simpl ...

Wall Street Journal
'' followed a policy of changing its published prime rate when 23 out of 30 of the United States' largest banks changed their prime rates. Recognizing that fewer, larger banks now control most banking assets—i.e., it is more concentrated—the ''Journal'' now publishes a rate reflecting the base rate posted by at least 70% of the top ten banks by assets.


Malaysia

Effective January 2, 2015, the Base Lending Rate (BLR) structure was replaced with a new Base Rate (BR) system. Under BR, which will now serve as the main reference rate for new retail floating rate loans, banks in
Malaysia Malaysia ( ; ) is a country in Southeast Asia Southeast Asia, also spelled South East Asia and South-East Asia, and also known as Southeastern Asia or SEA, is the geographical southeastern subregion of Asia, consisting of the regions ...

Malaysia
can determine their interest rate based on a formula set by Bank Negara, the Malaysian central bank. Malayan Banking Bhd (
Maybank Malayan Banking Berhad ( doing business as Maybank) is a Malaysia Malaysia ( ; ) is a country in Southeast Asia. The federation, federal constitutional monarchy consists of States and federal territories of Malaysia, thirteen states and thr ...

Maybank
) has set a group-wide base rate at 3.2%, effective Jan 2, 2015. All new retail loans and financing such as mortgages, unit trust loans, share margin financing, personal financing and overdraft facilities which are applied for by individual customers will be based on the base rate. Though certain banks may be setting a higher BR compared to others, they can sometimes offer lower ELR to customers in order to remain competitive. Loans that are already approved and extended prior to January 2, 2015 will still follow the old BLR until the end of the loan tenure.


Uses

The prime rate is used often as an index in calculating rate changes to
adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan A mortgage loan or simply mortgage () is a loan In finance, a loan is the lending of money by one or more individuals, organizations, or oth ...
s (ARM) and other variable rate short-term loans. It is used in the calculation of some private
student loans A student loan is a type of loan In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc. The recipient (i.e., the borrower) incurs a debt and is usuall ...
. Many
credit card #REDIRECT Credit card #REDIRECT Credit card A credit card is a payment card issued to users (cardholders) to enable the cardholder to pay a merchant for goods and services based on the cardholder's promise to the card issuer to pay them for ...

credit card
s and home equity lines of credit with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread or margin.


See also

* FRED (Federal Reserve Economic Data)


References


External links


International Prime Rates published by The Wall Street Journal Online



Current Rate, Definition & Historical Graph
{{DEFAULTSORT:Prime Rate Banking Federal Reserve System Financial economics Interest rates it:Prime rate