Have you ever heard of the Wall Street Journal Prime Rate? Do you know what it is? Are you affected at all by changes in the prime rate? The prime rate is a very important number for anyone that has certain types of loans. If the prime rate increases, then your rate increases. The same happens if the prime rate decreases. It’s important to understand at least the basics of the prime rate, as well as what can cause it to change.
What is the Prime Rate
The prime rate is a bank lending rate that is used as the index rate for different types of consumer debt. What does that mean? Basically the prime rate is a way to gauge what your interest rate will be. When you apply for a loan that is tied to the prime rate, your interest rate will be the prime rate plus/minus a certain percentage. If the bank tells you your interest rate will be, let’s say, 5%, then you would be prime plus 1.75%. Currently, the prime rate is 3.25%.
The prime rate is defined as ‘Effective December 16, 2008, however, the WSJ now determines the Prime Rate by polling the 10 largest banks in the United States. When at least 7 out of the top 10 banks have changed their Prime, the WSJ will update its published Prime Rate’ (wsjprimerate.us).
The Prime rate is tied to the Federal Funds rate. Prime Rate = Fed Funds Rate + 3. The current rate on the Fed Funds Rate is .25%. The Fed Funds Rate is set by a committee within the Federal Reserve system called the Federal Open Market Committee (FOMC). The prime rate is a trailing economic indicator, which means the rate will change after 7 of the top 10 banks already make changes.
What Loans are Tied to the Prime Rate
Odds are, you have a loan that is tied to the prime rate. It is important for you to know if the prime rate affects you. If you have a loan that is on the list and aren’t sure, call them to find out.
- Credit Cards
- Home Equity Lines of Credit (HELOC)
- Auto Loans
- Personal Loans
Most credit cards and HELOC’s are generally variable rates that are tied to the prime rate. If you have either of these loans, then it is very important that you keep track of the prime rate. If it changes, then your rate will change. Auto loans and personal loans are generally fixed rate loans, but when you applied the rate was prime + or – a certain percentage. It is important to understand the prime rate anytime applying for one of these types of loans.
The Federal Reserve recently announced that they will be leaving rates (the fed funds rate) steady until the end of 2014. Because the prime rate is tied to the fed funds rate, it is a great time to have a variable rate that is tied to the prime rate. While nothing is guaranteed, especially with the federal reserve, your variable rate loan will most likely be staying put for another 3 years.