What’s the prime rate?

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Andrew Goldman

Andrew Goldman has been writing for over 20 years and investing for the past 10 years. He currently writes about personal finance and investing for Wealthsimple. Andrew's past work has been published in The New York Times Magazine, Bloomberg Businessweek, New York Magazine and Wired. Television appearances include NBC's Today show as well as Fox News. Andrew holds a Bachelor of Arts (English) from the University of Texas. He and his wife Robin live in Westport, Connecticut with their two boys and a Bedlington terrier. In his spare time, he hosts “The Originals" podcast.

If you’ve ever shopped for a loan, you’ll find one bank may want charge you a hair more and another a hair less, but all of their rates will generally reside in the same ballpark. The location of that imaginary ballpark is dictated by the prime rate, a term that simply means the interest rate a bank will charge its most creditworthy customers.

The prime rate is the most relied upon basis for what banks charge for their loan products, like credit cards, mortgages and small business loans. Though there is no official United States prime rate, there is an informal agreed upon one that is 3% — or, in finance speak, 300 basis points — above the federal funds rate. (The federal funds rate is the interest rate set by the Federal Reserve for the money that banks regularly loan one another to assure that all banks have on hand the federally-required amount of cash reserves at all times.) Credit cards with variable interest rates will often be expressed as prime plus another interest rate, like 12%. If a loan like a mortgage is secured, meaning that you’ve provided collateral that the bank could take if you default, it’s common for the interest rate to be considerably below prime since banks tend to happily loan money on the cheap if they know they can always take your house.

So interest rates offered by the bank may vary wildly depending on the type of loan you seek and your credit worthiness, but the respective rises and falls of those various loan products will directly mirror the movement of the prime rate.

Last Updated March 6, 2018

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