Overview of Prime Rate
The prime rate is the interest rate banks charge preferred customers. It is largely determined by the federal funds rate. Banks also consider economic conditions when setting the prime rate. The prime rate influences other interest rates like those for mortgages, credit cards, and loans.
Historical Background and Guidelines
In the 1940s, the Federal Reserve Board established guidelines for banks to use the prime rate. It is the rate banks charge the most creditworthy companies. Rates for other customers are often prime rate plus a premium based on credit history.
Current Prime Rates
Today’s US prime rate is 3.25%, the lowest since 2008. Canada’s prime rate is 2.45%, the lowest since 2008. An example of another rate influenced by prime is the AFR or Applicable Federal Rate for interest on family loans, to avoid tax issues. The January 2021 AFR is 0.6% for short-term loans.