Prime rate

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The Prime rate is the rate number that the banks use to charge for interest on loans. It is most commonly used now as a gage for home equity line loans. Many adjustable rate loans also use the prime rate as their gage, but sometimes other indexes such as the LIBOR are used.

The prime rate has uses outside of the banking industry as well. Most credit card companies will use the prime rate as a gage when setting their interest rate.

Many other rates have a correlation with the prime rate although they operate separately. For instance fixed rate loans usually tie in more to the price of treasury bonds, but the price of bonds has a tendency to correlate roughtly with the prime rate.

The prime rate is directly affected by the federal funds rate. In recent times, the prime rate has been 3 percentage points above the federal funds rate.

In some areas, the prime rate is the highest interest rate that can be charged for personal loans between one individual and another. Financial institutions, of course, can charge more.