The U.S. Prime Rate
Posted on 07. May, 2007 by admin in Paid Reviews
This is Paid Review
The Wall Street Journal Prime Rate (WSJ Prime Rate) is the interest rate charged by banks when they lend money to other banks, or to their “prime” business customers. Most American banks and credit unions use this index as a foundation for their loan products; the rate is consistent because banks want to offer businesses and consumers loan products that are both profitable and competitive.Currently and traditionally, the Wall Street Journal Prime Rate is determined by polling thirty (30) of America’s largest banks. When twenty-three (23) of those 30 banks have changed their prime lending rate, The Wall Street Journal responds by updating their published Prime Rate.
When newspapers, academics, investors and economists refer to the National, Fed or U.S. Prime Rate, it is widely accepted that they are in fact referring to The United States Prime Rate as listed in the Eastern print edition of the Wall Street Journal. Furthermore, each U.S. state does not have its own individual Prime Rate, so the “New York Prime Rate” or the “California Prime Rate” are in fact the same as the United States Prime Rate.
Providers of commercial loans often use the U.S. Prime Rate as their base lending rate, then add a margin (profit) according to the risk of the given loan product.
It’s important to note that the Prime Rate is an index, not a law. Consumers and business owners can sometimes find a loan or credit card with an interest rate that is below the current Prime Rate. Lenders will sometimes offer below-Prime-Rate loans to highly qualified customers as a way of generating business. Furthermore, below-Prime-Rate loans are relatively common when the loan product in question is secured, as is the case with home equity loans, home equity lines of credit and car loans.
The U.S. Prime Rate is invariably tied to the Federal Funds Target Rate (also known as The Fed Funds Target Rate), and the Fed Funds Target Rate is set by a committee within the Federal Reserve system called The Federal Open Market Committee (FOMC). The FOMC usually meets every six weeks, and it is at these meetings that the FOMC votes on whether or not to make changes to the Federal Funds Target Rate. When the Fed Funds Target Rate changes, it is almost a certainty that the Wall Street Journal Prime Rate will also change. If the FOMC votes to make no changes to The Fed Funds Target Rate, then it is almost a certainty that the WSJ Prime Rate will also remain unchanged. For many years now, a rule of thumb for the U.S. Prime Rate has been:
U.S. Prime Rate = (The Fed Funds Target Rate + 3)
The FOMC’s primary objectives are to keep inflation under control and maintaining steady economic growth with maximum sustainable employment within the United States.
The U.S. Prime Rate is used by many banks to set rates on many consumer loan products, such as second mortgages, student loans, home equity lines of credit, car loans and credit cards. If you read or hear about a change to the U.S. Prime Rate, you can be sure that your adjustable rate mortgage, variable rate credit cards, or any other loan product that is tied to the prime rate will also change.
Click here for more information about how the U.S. Prime Rate works.
Click here to view a Flow Chart for the U.S. Prime Rate.
The Current Wall Street Journal Prime Rate is: 8.25%
(the last rate change — an increase of 25 basis points
[0.25 percentage point] — occurred on June 29, 2006)
