Prime (rate)

Debt Term

There are two related meanings of prime rate, which influences the interest rates on many business and personal loans. Generally the prime rate is the interest rate charged by commercial banks for short-term loans to major businesses that have the highest credit ratings. Second, there is an index of the prime rate that is published every business day in the Wall Street Journal, which surveys the 30 largest commercial banks daily. The prime rate index does not generally vary daily, but changes when 75% of those 30 banks have changed their rates.

The published prime rate is provided at the annualized simple interest rate – as of this writing it is 4.25%. In general the prime rate is equal to the interest charged for overnight lending between banks – the federal funds rate – plus 3%.

In other countries and for some US loans, the LIBOR index will be used to set loan interest rates; LIBOR stands for London InterBank Offer Rate.

Usage: “We will charge you prime plus 4” – meaning the interest rate will be the prime interest rate plus another 4% annual interest.

Don Gooding

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