Bank Prime Rate

If you're shopping for a new credit card, a loan of education, a car loan, a loan, personal loan or a specific type called a second mortgage online mortgage (HELOC) then you need to understand how U.S. Prime Rate works.

On Wall Street and throughout the banking community in the world, the U.S. Prime Rate is understood that the interest rate at which banks lend money to their business customers with the most creditworthy. Most U.S. banks, credit unions and other lending institutions use the U.S. as the prime rate of an index or base rate for numerous loan products, a margin is added to the prime rate based on risk the lender believes the loan is: the riskier the loan, the higher the margin. However, given the rate is an index and not a law, business owners and consumers can sometimes find loan products that have an interest rate that is below the U.S. Prime.

The U.S. Prime rate is determined by adding 300 basis points (3.00 percentage points) of the federal funds target rate (also known as the fed funds target rate.) So, if the target rate for federal funds 5.25%, the rate of U.S. Prime 8.25%.

The federal funds target rate is America's highest rate of short-term interest, and is controlled by a group within the U.S. Federal Reserve has called the Federal Open Market Committee (FOMC). The FOMC convenes a monetary policy meeting eight times each year to decide to move up, down or to make any change in the Fed funds target rate. The FOMC may also hold an emergency meeting at any time, if economic conditions warrant.

If the FOMC believes that the pace of inflation in the U.S. economy is too high, then the group is more likely to raise the fed funds target rate in order to bring inflation under control. Conversely, if the FOMC believes that many sectors of the U.S. economy are signaling a significant way, or if the economy is determined to be in recession, the group is more likely to reduce the target fed funds rate, to stimulate economic growth. If the U.S. economy grows at a moderate pace and inflation is also rising at a moderate pace, the FOMC is more likely to make no change in the Fed funds target rate.

When it comes to borrowing money, timing is crucial, it is important for consumers and business owners to stay informed of what the FOMC is likely to do with the Fed funds target rate at next FOMC monetary policy meeting. If the U.S. economy is showing clear signs of contraction, then off on a fixed rate loan may be a good idea, because in this economic environment, interest rates in the short term as prime may be on their way down. On the other hand, if the U.S. economy is growing at very high and the rate of inflation is relatively high, then borrowing via a fixed-rate loan sooner rather than later may be the smartest option, because in this economic environment, interest rates in the short term may be on their way up.