The prime rate is the interest rate that a lending institution will give its most creditworthy clients. It represents the best possible rate that these financial providers are willing to offer, given the lower risk profile that these customers present.
Prime rate is also used to determine consumer interest rates and the costs associated with borrowing money via credit cards, lines of credit, car loans and home mortgages. When you apply for a personal loan, auto loan, or another financial product, the current prime rate will impact the terms that you receive.
Note that the prime rate is influenced by and can fluctuate due to changes in the economy and can remain steady or shift depending on macroeconomic circumstances as well.
What Is the Current Prime?
|Prime Rate, Federal Funds Rate, COFI||This Week||Month Ago||Year Ago|
WSJ Prime Rate
Federal Discount Rate
Fed Funds Rate
(Current Target Rate 0.00-0.25)
|11th District Cost of Funds||0.50||0.52||1.10|
Can I Get The Prime Rate?
While the prime rate’s interest rates are certainly attractive, they are primarily meant for corporate clients whose credit is in the best possible shape and that are least likely to default on any sums borrowed. A large company seeking to finance the construction and purchase of a new campus or research and development center might be able to obtain it. An individual shopper cannot. However, an average, everyday consumer with a high credit rating (700+) may be able to secure a more favorable interest rate than borrowers with poor credit or less of a credit history by practicing good credit habits.
In effect, financial institutions use the prime rate as a gauge when setting interest rates on various short-term loan products including credit cards, adjustable-rate mortgages (ARMs), home equity loans, auto loans and more. It’s not uncommon to find the interest rates on these financial products represented in the form of a certain percentage (determined by myriad factors like the borrower’s credit history and rating) on top of the prime rate. While you won’t get access to the prime rate itself, you can certainly lower the interest rate that you are charged in many instances by making timely payments and being responsible with your commitments to creditors.
How The Prime Rate Affects Consumers
Think of the prime rate as a baseline starting point at which lenders begin to look at and determine the interest rates on credit cards, mortgages, personal loans, auto loans and other financial products for consumers. But while the interest rate ultimately charged by a financial lender is influenced by the prime rate, it will not be the actual interest rate that you can expect to pay. Rather, the interest rate that you will pay as an everyday borrower or shopper will be above the prime rate, as individually determined by your financial lender.
For example, it’s not uncommon for credit card APRs (which can fluctuate along with the prime rate) to top 15%, although actual interest rates paid will vary based on your credit score, credit history, and individual lender. In general, though, the better your credit score, the lower your interest rate will be.
The prime rate can also greatly impact loans with variable interest rates, e.g. adjustable-rate mortgages and home equity lines of credit (HELOCs). As a rule of thumb, the higher the prime rate goes, the likelier it is the APR on your credit card or interest rate on your mortgage will go. By the same token, if the prime rate goes down, you may wish to consider refinancing your mortgage or renegotiating credit card terms to secure a better interest rate as well.
If you’ve locked in an interest rate on a fixed-rate financial product, i.e. an auto loan or personal loan, your interest rate won’t impacted by the prime rate, as it was cemented at the time you applied for the loan.
Adjustable rates most commonly come up in the context of mortgages. An adjustable-rate mortgage has an interest rate that stays fixed for a period of time after the beginning of the loan. Once that time frame is up, it adjusts, typically once or twice a year for the remainder of the term. ARMs may be adjusted by adding the prime rate to a margin, but most commonly, other indexes like SOFR and CMT are used. However, these indexes themselves may in turn be influenced by the prime rate.
How Is The Prime Rate Determined?
Prime rate is determined by the Federal Reserve Board, which meets periodically to set monetary policy, including the target federal funds rate (the interest rate that commercial banks charge to lend money to each other).
Typically, the prime rate is set at the federal funds target rate plus around 3%, meaning that if the Federal Reserve raises interest rates, the prime rate will also increase as well.
Prime rate can theoretically adjust at any point in time. However, in practice, it primarily shifts only when a key benchmark to which it is linked (like the federal funds rate) moves. During more volatile economic times such as a pandemic or a recession when policymakers are actively making regular changes, prime rate could change several times within the space of a year. At other times, the prime rate can go months or even years without significant changes.
Events such as economic pullbacks can result in a lower prime rate. Currently, the prime rate is 3.25%, with the federal funds rate having recently been lowered to nearly 0% due to concerns raised by the pandemic and ongoing market uncertainty. The prime rate is currently sitting at one of the lowest rates seen all year, and in over a decade.
How To Qualify For The Prime Rate
As above, the primate rate isn’t really meant for individuals. Rather, it is intended for companies and corporate clients. But regardless of the current prime rate today, you can still take steps to secure the best possible interest rate on a mortgage, personal loan, or other financial product.
Worth keeping mind here: All forms of lending are an exercise in making smart decisions with money by accounting for relative levels of risk. If financial institutions perceive you to be a low-risk borrower, it can make you a good candidate to get the best possible interest rates available.
To this extent, one of the first things any lender will look at in determining your qualifications, and how much of a potential risk that you might present, is your credit score. The higher it is, the better your chances of being approved for a loan are and that you have of qualifying to receive better interest rates. The length of your credit history also matters because the longer you can show regular and timely payment of financial debts, carrying little or no credit card balance month-to-month, and only applying for the credit and loans that you need, the better.
You can also improve your chances of loan approval, and in some cases your interest rate, by keeping a relatively modest debt-to-income ratio (DTI). In effect, the less of your income that goes toward making payments on existing debt every month, the more income you’ll have to handle payments on another loan or line of credit – and the less of a risk that lenders will perceive you to be.
Also worth noting: When it comes to installment loans for cars, mortgages and other expenses, the bigger the down payment you provide, the better your interest rate will generally be. If you put more money down up front, it shows commitment, and there’s always less risk for a lender associated with a smaller loan amount.
The Bottom Line
The prime rate is the lowest interest rate that a financial provider such as a bank or credit union is willing to extend a line of credit at. This rate is reserved for the most well-qualified clients (i.e. large companies and corporations) as opposed to individuals, who will instead be charged at interest rate levels that sit above the prime rate.
Each financial institution that wishes to lend money sets its own prime rates, which are tied to other major borrowing rates such as the federal funds rate, and include the institution’s profit margin added in. Rates for financial products like credit cards and home equity lines of credit are based on an aggregate of prime rates from many major banks, like the one reported weekly by the Wall Street Journal.
Prime rates are typically associated with credit cards and other revolving credit lines. ARMs and other loans that adjust periodically are based on other indexes which may or may not be influenced or in some way derived from the prime rate. When the prime rate changes, it can have an impact on the financial lending landscape, and how much you may expect to be asked to pay in interest on any sums borrowed.
While consumers can’t get access to the prime rate, practicing good credit habits and being responsible and timely with payments can help you get the best interest rate possible. Put simply: The higher your credit score, the lower the interest rates you’ll be able to secure, and more loan options that will become available to you.
For further information on the inner workings of loans and lines of credit, be sure to visit our Learning Center.