How Is the Prime Lending Rate Determined?


Quick Answer

The prime lending rate is determined according to the Federal Funds Target Rate, which is set by the Federal Open Market Committee every six weeks, states FedPrimeRate.com. The U.S. prime rate is determined by adding 3 percent to the federal funds target rate.

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Full Answer

The prime lending rate, commonly known as the U.S. prime rate, is a widely used benchmark that allows banking institutions to set interest rates on loans such as home equity lines of credit, credit cards, auto loans and personal loans, according to Bankrate. The prime rate is primarily reported by the Wall Street Journal, which surveys large banks and publishes the consensus prime rate. This publication is considered the authoritative source of the current U.S. prime rate.

The U.S. prime rate is recognized by all banking institutions across the United States, says FedPrimeRate.com. Several other common names include the National, Fed, United States or WSJ prime rate, but they all refer to the U.S. prime rate.

The U.S. Prime Rate is an index, not a law, states FedPrimeRate.com. Financial institutions may offer services with rates that are lower than the Prime Rate for secured loans like home equity lines of credit and auto loans, and these ultra-low rates may be used to entice new business.

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