The prime rate or prime lending rate is an

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...

used by banks, typically representing the rate at which they lend to their most creditworthy customers. Some variable interest rates may be expressed as a percentage above or below prime rate.

Use in different banking systems

United States and Canada

Historically, in North American

banking A bank is a financial institution that accepts Deposit account, deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital m ...

, the prime rate represented actual interest rate charged to borrowers, although this is no longer universally true. The prime rate varies little among banks and adjustments are generally made by banks at the same time, although this does not happen frequently. , the prime rate was 7.50% in the

United States The United States of America (USA), also known as the United States (U.S.) or America, is a country primarily located in North America. It is a federal republic of 50 U.S. state, states and a federal capital district, Washington, D.C. The 48 ...

and 5.20% in

Canada Canada is a country in North America. Its Provinces and territories of Canada, ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, making it the world's List of coun ...

. In the United States, the prime rate runs approximately 300

basis point A basis point (often abbreviated as bp, often pronounced as "bip" or "beep") is one hundredth of 1 percentage point. Changes of interest rates are often stated in basis points. For example, if an existing interest rate of 10 percent is increased ...

s (or 3 percentage points) above the

federal funds rate In the United States, the federal funds rate is the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight on an collateral (finance), uncollateralized basis ...

, which is the interest rate that banks charge each other for overnight loans made to fulfill reserve funding requirements. The federal funds rate plus a much smaller increment is frequently used for lending to the most creditworthy borrowers, as is LIBOR, the

London Interbank Offered Rate The London Inter-Bank Offered Rate (Libor ) was an interest rate average calculated from estimates submitted by the leading banks in London. Each bank estimated what it would be charged were it to borrow from other banks. It was the primary b ...

. The

Federal Open Market Committee The Federal Open Market Committee (FOMC) is a committee within the Federal Reserve System (the Fed) that is charged under United States law with overseeing the nation's open market operations (e.g., the Fed's buying and selling of United Stat ...

(FOMC) meets eight times per year to set a target for the federal funds rate. Prior to December 17, 2008, the ''

Wall Street Journal ''The Wall Street Journal'' (''WSJ''), also referred to simply as the ''Journal,'' is an American newspaper based in New York City. The newspaper provides extensive coverage of news, especially business and finance. It operates on a subscriptio ...

'' followed a policy of changing its published prime rate when 23 out of 30 of the United States' largest banks changed their prime rates. Recognizing that fewer, larger banks now control most banking assets (that is, it is more concentrated), the ''Journal'' now publishes a rate reflecting the base rate posted by at least 70% of the top ten banks by assets.

Malaysia

Effective January 2, 2015, the Base Lending Rate (BLR) structure was replaced with a new Base Rate (BR) system. Under the BR system, which serves as the main reference rate for new retail floating rate loans, Malaysian banks can determine their interest rate based on a formula set by Bank Negara, Malaysia's central bank. Malayan Banking Bhd (

Maybank Malayan Banking Berhad (doing business as Maybank) is a Malaysian universal bank, with key operating "home markets" of Malaysia, Singapore, and Indonesia. According to the 2020 Brand Finance report, Maybank is Malaysia's most valuable bank b ...

) has set a group-wide base rate at 3.2%, effective Jan 2, 2015. All new retail loans and financing such as mortgages, unit trust loans, share margin financing, personal financing and overdraft facilities which are applied for by individual customers will be based on the base rate. Though certain banks may be setting a higher BR compared to others, they can sometimes offer lower ELR to customers in order to remain competitive. Loans approved and extended before January 2, 2015 continue to follow the old BLR until the end of their loan tenure.

Uses

The prime rate is used often as an index in calculating rate changes to

adjustable-rate mortgage A variable-rate mortgage, adjustable-rate mortgage (ARM), or tracker mortgage is a mortgage loan with the interest rate on the note periodically adjusted based on an index which reflects the cost to the lender of borrowing on the credit markets.Wie ...

s (ARM) and other

variable rate A floating interest rate, also known as a variable or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument. Floating inte ...

short-term loans. It is used in the calculation of some private

student loans A student loan is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses. It may differ from other types of loans in the fact that the interest ...

. Many credit cards and home equity lines of credit with variable interest rates have their rate specified as the prime rate (index) plus a fixed value commonly called the spread or margin.

References

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External links