What is Prime Rate? - Definition and Current Statistics

Prime Rate is currently 3.25%. (as of December 16, 2011)

While the exact definition of prime rate varies from country to country, in the United States, the prime rate is the interest rate banks charge their best commercial customers for short-term loans. The Prime rate of interest serves as a benchmark for most other loans in the US including short term business loans and home equity loans. Contrary to popular belief prime rate is not set by the government. Banks generally set prime based upon the Fed Funds rate. Prime is currently set at the fed funds rate plus 3%. The fed funds rate is set by the federal reserve via their "fed funds target rate" so in a way the goverment does influence prime rate although indirectly.

Prime rate can vary from bank to bank. Most sources quote the Wall Street Journals average. The Wall Street Journal surveys large banks and publishes what is called a consensus prime rate. The Journal surveys the 30 largest banks, and when 75% of them change, the Journal changes its posted rate.

Prime rate is forecast to drop one quarter to one half percent over the next year and is not expected to rise above 5% until 2010. Given current economic uncertainties this can of course change.

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