The Prime Lending Rate – sometimes just called “Prime” – is the interest rate that banks charge each other for overnight loans. Some consumer rates – like ARMs – are set in relation to Prime. In the US, Prime is affected by the Federal Reserve lending rate to banks; historically, Prime is about 3 percent above the Fed rate. The video shows an example.
- The Federal Reserve loans to Bank A at 1%
- Bank A loans to Bank B at 4%
- Both banks – A & B – will recalculate variable-rate loans like ARMs on that 4% Prime figure.
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