Home
Back
Prime Rate Formula:
| From: | To: |
The US Prime Rate is the interest rate that commercial banks charge their most creditworthy customers, typically large corporations. It serves as a benchmark for many other interest rates in the economy, including credit cards, mortgages, and business loans.
The Prime Rate is calculated using the formula:
Where:
Explanation: The Prime Rate is directly tied to the Federal Funds Rate, which is the rate at which banks lend to each other overnight. Banks add a spread (usually 3 percentage points) to cover their costs and generate profit.
Details: The Prime Rate influences borrowing costs throughout the economy. When the Prime Rate changes, it affects interest rates on credit cards, home equity lines of credit, auto loans, and small business loans, making it a crucial indicator of economic conditions.
Tips: Enter the current Federal Funds Rate and the desired spread (default is 3.00%). The calculator will compute the corresponding Prime Rate. Both values must be positive percentages.
Q1: Who sets the Prime Rate?
A: Individual commercial banks set their own Prime Rates, but they typically follow the rate set by the Wall Street Journal, which surveys the 30 largest US banks.
Q2: How often does the Prime Rate change?
A: The Prime Rate changes when the Federal Reserve adjusts the Federal Funds Rate. It can remain unchanged for extended periods or change multiple times in a year.
Q3: Is the 3% spread always used?
A: While 3% is the traditional spread, some banks may use slightly different spreads. The 3% figure represents the historical average that most major banks follow.
Q4: What is the current Prime Rate?
A: The Prime Rate changes with monetary policy. Check the Federal Reserve or major financial news sources for the most current rate.
Q5: How does the Prime Rate affect consumers?
A: Changes in the Prime Rate directly affect variable-rate credit products like credit cards, home equity lines of credit, and adjustable-rate mortgages.