Using Prime Rate

Consider prime rate trends when saving, borrowing or both

Whether you're seeking a variable rate business loan or credit card or are looking to refinance your building, it behooves you to have a good knowledge of the prime rate. The Wall Street Journal publishes this all-important number based on the Federal Reserve Bank's decisions.

If your business is in the financial sector, you also need to keep up on prime rate listings. They can affect consumer borrowing and spending, which influences the entire economy. Here is what you should do to stay informed:

1. Check newspapers or online sources for the latest prime rate forecast.

2. Determine the current prime interest rate before applying for loans with prime rate lenders.

3. Keep abreast of all prime rate news that can have an affect on your business so you're not blindsided by a sudden rise or fall.

 

Research the prime rate forecast

The prime rate is tied to the federal funds rate, which the head of the Federal Reserve (Fed) can raise and lower as he or she sees fit in response to economic conditions. These changes take place during Federal Open Market Committee meetings, which happen eight times per year. To calculate prime, add three basis points to the federal funds rate. If the Fed rate is 1.5, the prime rate is 4.5.
Try: Check the dates of Fed meetings on the Federal Reserve System's website (note that there are sometimes unscheduled emergency meetings). Then closely watch the financial news for the couple of weeks leading up to each date. Most times economists can forecast changes in the prime rate pretty accurately. Also visit the Wall Street Journal's complete prime rate history. It may be able to give you a one-up on trends.

See how the current prime rate will affect your loan

Most loan rates are not the same as the prime rate, but do ebb and flow as it trends. So, once you figure out prime, you still have some work to do to determine how much it will cost you to borrow. Financial institutions can base their loans on prime directly or on one of several other indexes that trend off of it.
Try: Go to Bankrate to view the latest number for the prime rate. Then go to Money Cafe to see how loan indexes, like the LIBOR, usually correlate to prime. Contact your lending institution to see exactly what number it uses to calculate its loans. Note that a lender can still raise or lower the rate due to your credit risk so it may not be the same as the answer you get.

Keep up to date on bank prime rate news

Prime rate changes can affect not only loans but also interest on savings accounts, CDs and bonds. That's because banks are using prime rate as a basis for their savings products too, with reductions in the rate hurting you instead of helping. If you have a lot of money tied up in savings, it's in your best interest to stay informed.
Try: Visit Bloomberg at least once a month to see how the Treasuries rates are looking in reaction to changes in prime. If you find your savings interest falling considerably, read Walletpop's article on avoiding cashing out prematurely so you don't make an uneducated mistake.

 

• Don't get an adjustable rate loan you can't afford trusting that the prime lending rate will go down. Forecasts are never 100% accurate and you could end up defaulting.

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