Attention students, class is now in session!

Today at The Money Kings, we have our Sunday Studies post. Generally this category will be dedicated to sharing educational information with our readers to help expand your knowledge.

This week’s topic: The Prime Rate

I’m sure most of you have heard of this term. Adjustable rate mortgages (ARMs) usually use the prime rate for calculating their adjustments. Banks and credit cards typically reference it by saying that your interest rate is “Prime plus something”. For example, the rate on my home equity line of credit (HELOC) is “Prime + 1%”. But what is the Prime Rate, and where do I find it?

Investopedia defines the prime rate as: “The interest rate that commercial banks charge their most credit-worthy customers. Generally a bank’s best customers consist of large corporations.”

Generally the prime rate can be derived from the federal funds rate, which is the interest rate that banks charge to each other for overnight loans made to fulfill reserve requirements. The prime rate typically runs 300 basis points, or 3%, higher than the Federal Funds Rate, although this is not a set rule. Currently the Federal Funds rate is set at 3.50% (effective as of 01/22/08) and, as of this writing, the prime rate is 6.5%. On any given day I use Bloomberg’s site to lookup the published prime rate located at the following web address:
http://www.bloomberg.com/markets/rates/

The most commonly recognized prime rate index is the Wall Street Journal Prime Rate. The WSJ defines the index as “The base rate on corporate loans posted by at least 75% of the nation’s 30 largest banks.” This means that when 23 out of 30 of the United States’ largest banks change their prime rate, the WSJ prints a composite prime rate change. You can also lookup the rates on the WSJ website at this web address: http://www.bankrate.com/brm/ratewatch/leading-rates.asp

Now you’re armed with the definition of the prime rate, and can calculate what rate you’re paying on those auto loans, credit cards, student loans, ARMs, and anything else under the sun. Feel free to go shop around for the best loan rates possible with your new information. At The Money Kings, we feel that the more knowledge you have, the more money you can save yourself!

Class Dismissed.

The Money Kings

Keywords: prime rate, federal funds rate, interest, heloc, arm, credit cards, WSJ prime rate index