Calculating the Prime Rate

• To calculate a prime rate, you must first know the federal funds target rate which is a short-term rate set by the Federal Reserve of the United States. The prime rate is equal to 3 percent plus the Federal Funds Target Rate. So, if the federal funds target rate is .50 percent, the prime rate would be 3.50 percent. You can find the current federal funds target rate (and thus calculate the prime rate) by visiting the Federal Reserve website's "Selected Interest Rates."
  
  The federal fund target rate can increase, decrease or remain the same depending on the economic conditions in the United States. A monetary policy making board of the Federal Reserve sets the rate to control inflation, recession, financial liquidity and other conditions affecting the American economy.
  
  

Finding the Prime Rate

• One of the best sources for finding the prime rate is the Wall Street Journal. The Wall Street Journal has a website online which calculates and publishes the most current prime rate as well as providing a prime rate forecast.
  
  

Impact of Prime Rate

• For the consumer, the prime rate affects how much financial interest he or she must pay to borrow money, whether for a car loan, credit card or other type of short-term loan. A bank, credit union or financial institution will take the prime rate and add additional interest (known as the margin) to generate profit for itself and to cover any risks associated with lending loans to consumers.
  
  Consumers and businesses with good credit typically get lower-interest rates than those with poor or no credit history. Consumers and businesses can sometimes obtain loans with an interest rate that is set below the current prime rate when the loan is secured (an asset is pledged as collateral) in the case of a home equity loan or home equity line of credit.
  
  

Comparing Interest Rates

• Visit any bank office or website and you can obtain the list of current interest rates for the different loans they offer. Interest rates fluctuate based on the current prime rate, bank's margin, credit worthiness of the borrower, the type of loan in question and other factors, so it is best for consumers to shop around at different banks to obtain the best rates. This is especially the case for credit cards which typically charge a wide range of interest rates.
  
  

Prime Rate Forecasts

• Prime rate forecasts, such as those found in the Wall Street Journal, are helpful for timing when and when not to borrow money. When the prime rate is low, for example, interest rates are typically lower, making it more favorable for consumers and businesses to take out short-term interest loans versus fixed rate loans.