Whether it’s a new car or your first home, obtaining a loan isn’t always easy. The affordability of your loan interest rates greatly depend on your credit, which determines how high or low the interest rates you receive will be. The better your credit, the lower your rates and vice versa.
Prime Lending Interest Rate Definition
Of course, even a person with perfect credit still has to pay some interest on their loan, otherwise there would be no incentive for banks to lend out money in the first place. Even so, financial institutions reserve the lowest possible interest rate they’re willing to extend for the highest quality customers. This is known as a prime interest rate.
The prime interest rate can vary by bank, but it is based on what the Federal Reserve has set as its prime rate. When the Fed’s rate increases, so do banks’.
Federal Reserve Prime Lending Rate
The Federal Reserve is responsible for setting the borrowing rates for banks. When the Fed raises its rate, banks must pay more to borrow money and thus pass that increase onto customers in the form of higher loan rates as well. The opposite is also true. That’s why the Federal Reserve prime lending rate directly affects national prime lending interest rates.
Historical Prime Lending Rates
Since there isn’t any one concrete prime rate, the prime lending rate of several banks is averaged to come up with one number.
Today, the prime lending interest rate is resting at 3.25 percent. Here’s what the prime rate has been as of September for each year over the past decade:
- 2000: 9.50 percent
- 2001: 6.50 percent
- 2002: 4.75 percent
- 2003: 4.00 percent
- 2004: 4.50 percent
- 2005: 6.50 percent
- 2006: 8.25 percent
- 2007: 8.25 percent
- 2008: 5.00 percent
- 2009: 3.25 percent
As you can see, the present prime lending interest rate is quite low compared to years past. Right now, borrowers with excellent credit have the opportunity to obtain unusually low interest rates before they rise again.
