Many Commercial lenders use the WSJ Prime rate as the base rate for commercial lending. I get questions almost every time a loan is structured using the "Prime Rate" Here is a bit of insight to understanding our "Prime Rate" and why it is used.
The Wall Street Journal prime rate is the rate set by then Federal Open Market Committee for short-term interest rates for the banking industry of the United States. Many different types of lending institutions use this rate as a foundation for the rates that they charge for short-term loan products. This allows the lending institutions to use a base rate to set a competitive price that will be profitable for the company and allows consumers to compare similar loan products from competing lending institutions to determine which one is the best value.
The Wall Street Journal prime rate is printed in the Eastern print edition of the newspaper and is considered to be the standard across the nation. If the "Prime Rate" is mentioned by a newspaper, investor, or economist, they are typically referring to this rate. The rate was traditionally determined by gathering information from 30 of the largest banking institutions and changed when 23 of those institutions had changed their prime lending rate. At the end of 2008, the methodology was changed to polling the top 10 bank institutions in the United States and changing the prime rate when 7 of those 10 changed their prime lending rate.
The Wall Street Journal prime rate is used by many lending institutions as a base rate for their loan products. An additional margin is added to this rate according to the risk associated with the account. Only the best, most credit worthy borrowers are offered the prime rate for their loan products, with all others paying more based on their credit score. Some lenders offer below prime rates for specific types of secured loans, such as home equity loans and car loans, because there is collateral backing the loan.
The Wall Street Journal prime rate may also be used for pricing time-deposit products such as Certificates of Deposit that have a variable rate. The prime rate is set during a meeting of the Federal Open Market Committee that occurs roughly every 6 weeks where the members come together and vote on whether the rate should be raised, lowered, or remain the same. This allows the Federal Open Market Committee to control inflation and maintain steady economic growth by adjusting the prime rate.
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