Prime Rate
IntermediateThe prime rate is the interest rate that commercial banks in the United States and some other countries charge their most creditworthy customers, used as a benchmark for many other loans.
In the United States, the prime rate moves closely with the Federal Reserve's policy rate. Most major US banks set their prime rate at about 3 percentage points above the upper limit of the federal funds target range, and change it whenever the Federal Reserve changes rates.
Many variable-rate loans are priced as the prime rate plus a margin. Examples include credit cards, home equity lines of credit, some business loans and some student loans. For example, if the prime rate is 7.5%, a credit card might charge prime plus 14%, or 21.5%.
Because of this link, when the Federal Reserve raises or lowers interest rates, the cost of many consumer and business loans in the United States changes almost immediately.
Canada also uses a prime rate, set by its major banks and linked to the Bank of Canada's policy rate. Many other countries do not use a prime rate in the same way. In the United Kingdom, for example, many variable-rate loans and mortgages are linked to the Bank of England's Bank Rate or to a lender's own standard variable rate.
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