Primed to Talk About the Prime Rate

JAN 31, 2012

What is the prime rate? Do you know? Not everyone does. In fact, its not uncommon that many people wouldnt be able to tell you the number value of the current prime interest rate, but oftentimes theyre not sure what the definition of the term is either.

In a nutshell, the prime rate is the interest rate banks charge to their best ( prime ) customers. Its usually the same throughout the banking industry, and most banks adjust the rate at the same time. Generally, banks set their prime rate to follow the Fed Funds Rate, which is controlled by the Federal Open Market Committee (FOMC). The Fed Funds Rate is the interest rate banks charge each other.

Now that you can answer the question what is the prime rate  you may be wondering why you should care. That answer is even easier. The prime rate affects the interest you pay for virtually every credit transaction, especially for home and auto loans.

Many lenders will base their interest rates on the prime rate, adjusting that amount on a sliding scale depending on the credit score of the applicant among other factors. Adjustable rate mortgages (ARMs) are usually tied to the prime rate. You may even have a credit card interest rate that moves with the prime rate.

So whats the prediction for the prime rate in 2012? We scoured multiple online financial resources and the consensus seems to be it will hold steady at least through the first half of the year.

As of writing this, the prime rate is 3.25, so if youre thinking about buying a house this year, keep in mind that the prime is really low right now. Borrowing money when the prime and other lending rates is low can help save you thousands of dollars over the life of a loan.