The Prime Rate helps banks set loan rates for investors and other consumers.
To understand financial markets and products and personal finances, it is best to start at the beginning, and the beginning is the prime rate.
The prime interest rate is the cost of doing business, specifically the rate that banks charge each other when they do inter-bank business. It is the best rate available for any money that is borrowed or lent.
For citizens, the prime rate helps set the interest rate banks offer to them for loans or mortgages. In many cases, the bank will state clearly that the loan rate is “prime plus” meaning it is the prime rate plus whatever additional interest they want to charge.
Similarly, the prime rate sets the interest rate on savings accounts and other savings products such as certificates of deposit.
The prime rate is set by the Federal Reserve, and since the economic downturn of 2008, the prime rate has been very low. When the prime rate is low, interest rates are low, and it creates a business mood in which borrowers would be willing to apply for loans at a very low rate of interest so they could invest it in creating new businesses.
A low prime rate also creates a boost for the housing industry and automobile industry as mortgage and auto loan rates are similarly low, making the cost of buying a house or car lower. Again, the idea is to stimulate an economy that is in the midst of a recession or significant downturn.
Because of the lower prime rate, consumers also have gotten far less in terms of an interest rate in their savings accounts or savings certificates or money market accounts. This also relates to stimulating growth, as funds are directed more at loans than at savings accounts. When the prime rate is higher, saving account interest rates are higher, which makes it a good time to invest in a long-term certificate of deposit to tie into a higher interest rate for the term of the CD.
Amid reports that the American economy has strongly rebounded from the recession of five years ago, industry analysts have expected the Federal Reserve to raise the prime rate to slow the flow of money and avoid inflation.
Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.