Current and Historical US Prime Rates

What is the US prime rate and how is it determined?

The current US prime rate is 7.50%. The US prime rate is the base lending rate that banks use for their loans. In simpler terms, it is the rate banks typically charge their most creditworthy borrowers. So, a higher prime rate means banks will charge higher interest for their loans.

The US prime rate is determined individually by each bank, but most follow the same formula. The major driving factor for the prime rate is the US federal funds target rate, which is set by the Federal Reserve. This rate is what the US government uses to control bank lending rates and, as such, influence the US economy. Then, banks such as JPMorgan Chase, Bank of America, and Wells Fargo set their prime rate, usually about 3 percentage points higher than the federal funds rate. Once the major banks set their prime rate, many of the medium to small banks typically follow. This creates a uniform prime rate across the US. As such, the US prime rate and federal funds rate are very closely correlated.

How do changes in the US prime rate impact consumers and businesses?

Since the US prime rate is the base lending rate for banks, changes can have a large impact on consumers and businesses. Two of the major sectors are mortgages and car loans. The prime rate has a major impact on when people apply for home or car loans. This is because people want the lowest interest rate possible, so few apply for home or auto loans when the prime rate is high.

Furthermore, variable rate loans such as credit card APR, some student loans, or HELOC loans are also impacted. During high prime rates, these loans force people to pay more in interest, causing consumers to spend less. As such, businesses are also affected by lower consumer spending. With these major impacts, it is clear that the US prime rate has a major influence on how consumers are spending and on the US economy overall.