The prime rate is the interest rate that banks charge to their most creditworthy customers. It is used as a reference point for pricing some loans and lines of credit, such as adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs).
The prime rate is set by banks, and is often influenced by the federal funds rate, which is set by the Federal Reserve. The prime rate is usually a few percentage points higher than the federal funds rate.
Borrowers who have loans or lines of credit with rates that are based on the prime rate will see their rates go up or down when the prime rate changes. For example, if the prime rate goes up, the interest rate on an ARM will go up. If the prime rate goes down, the interest rate on a HELOC will go down.
The prime rate has been at its current level of 3.25% since December 2016. Prior to that, the last time the prime rate was this low was in the early 1950s.
The prime rate has changed a lot over time. It has been as low as 1.75% and as high as 21.5%. The average prime rate over the last 50 years is 8.95%.