Prime Rate
Benchmark lending rate charged by banks to their most creditworthy customers, tracking the federal funds rate.
The prime rate is the interest rate that major U.S. commercial banks charge their most creditworthy corporate borrowers for short-term loans. It serves as a benchmark for a wide range of consumer and business lending products, including home equity lines of credit (HELOCs), business lines of credit, commercial loans, credit card rates, and student loans.
The prime rate is not set by the Federal Reserve but moves in lockstep with Federal Reserve monetary policy. By convention, the prime rate equals the federal funds target rate plus 3.00 percentage points. When the FOMC raises the federal funds rate by 25 basis points, the prime rate increases by the same amount. The Wall Street Journal publishes the prime rate daily based on a survey of the 10 largest U.S. banks.
For consumers, most HELOCs and variable-rate credit cards are priced as 'prime plus X%' (a margin above prime), meaning payments increase automatically when the Fed raises rates. For businesses, many commercial lines of credit and variable-rate term loans are similarly priced off prime.
The prime rate matters for CFOs and treasury managers because it determines the cost of working capital borrowing. Companies with revolving credit facilities tied to prime model interest expense as a function of expected Fed rate path. During rate hiking cycles, rising prime rates increase borrowing costs and reduce profitability for businesses carrying floating-rate debt.
In global finance, other countries have analogous benchmark lending rates (LIBOR replacement rates like SOFR in the U.S., SONIA in the U.K., €STR in Europe) that serve similar anchoring functions for loan pricing.
FAQs
Which loans and credit products use the prime rate as a benchmark?
Products commonly priced off the prime rate include home equity lines of credit (HELOCs), home equity loans, most variable-rate personal loans, many credit card rates (particularly for consumers with good credit), variable-rate SBA loans, commercial lines of credit for small businesses, and some auto loans. Products tied to prime adjust automatically when the prime rate changes—usually with 30 days' notice. Products tied to SOFR or Treasury yields (most mortgages, commercial real estate loans) track different benchmarks and may move differently than prime-linked products.
Is the prime rate the same as the base rate?
The prime rate is the U.S. term; base rate is the equivalent term used in the United Kingdom (set by the Bank of England) and some other countries. Both concepts refer to a benchmark short-term lending rate used to price variable-rate loans, but they are set by different mechanisms: the U.S. prime rate follows the fed funds rate by convention, while the Bank of England base rate is set directly by its Monetary Policy Committee. Global companies borrowing in multiple currencies deal with different base rates in each market.
How does a company hedge exposure to prime rate fluctuations?
Companies with variable-rate debt tied to prime can hedge interest rate exposure through interest rate swaps, in which they exchange their floating-rate payment obligation for a fixed-rate payment with a counterparty bank. A company borrowing $10M at prime plus 2% might enter a swap to pay fixed 6% and receive prime, effectively converting their variable-rate loan to a fixed rate. Interest rate caps are another hedging tool—they cap the maximum interest rate the company pays while allowing participation in rate decreases. Both instruments reduce uncertainty in cash flow forecasting and protect against rising rate scenarios.
Related Terms
Federal Funds Rate
Interest rate at which banks lend reserves to each other overnight, set by the Federal Reserve.
SOFR
Secured Overnight Financing Rate, the primary U.S. replacement for LIBOR, based on overnight Treasury repo transactions.
Revolving Credit Facility
Flexible bank credit line allowing repeated borrowing and repayment up to an approved limit.
Bridge Loan
Short-term financing used temporarily until permanent long-term funding is arranged.
