The prime rate is the lowest interest rate that banks or other creditors charge to their borrowers. This is mostly granted to those with prime credit score (above 660) who creditors see as low risks borrowers. But regardless if you qualify for this lowest interest rate or not, you are still greatly affected by it. This is because the prime rate is the baseline of interest rates.
The lower the prime rate today, the lower the interest rates of loans. Creditors decide the interest rates based on the prime rate. If you are not qualified to be charged the prime rate, you will be charged higher than it. Therefore, as the prime rate increases, interest rates will also increase. Note that creditors will decide on the interest rate you will be charged based on your credit score, income, and length of repayment.
Hence, it is important to monitor and improve your credit score. You can easily do this by using credit repair software or by hiring a credit repair service to do it for you. Credit repair services can be expensive depending on how bad your credit is. There is no shortcut when it comes to repairing credit as you will have to wait for the bureaus to reply. To save money, I suggest using credit repair software. It can help you get and review your credit reports in no time. Detect errors automatically and accurately. And generate dispute letters which you will need to file a dispute and improve your credit score.
The Prime Rate History Over the Last 5 Years
The prime rate may change anytime, depending on the economy. It may fluctuate once, twice, or four times a year. There are also times when it does not change for the entire year. Just like in 2021. To give you an idea of how the prime rate changes over the years, here are the fluctuations in the past 5 years.
Prime rate changes in 2017
In March 2017, the prime rate increased to 4%. It was the first time it reaches 4% since 2008. It continues to increase in June, making it 4.25%. Before 2017 ended, another fluctuation happened making it 4.50%.
Prime rate changes in 2018
In March 2018, the prime rate continues to increase four times. It raises to 4.75% in March. 5% in June. 5.25% in September. Then it rises to 5.50% by the end of the year, December 2018.
Prime rate changes in 2019
The prime rate finally decreased by the third quarter of 2019. It reduces to 5.25% in August 2019 from 5.50% in December of the previous year. Another reduction happened by October making it 4.75%.
Prime rate changes in 2020
Drastic changes in the lowest interest rate happened in 2020 when it has a huge decrease in just one month. The first reduction happened on March 04, 2020, which makes it 4.25% from 3.75% in the previous year. Then after just two weeks, on March 17, 2020, a 1% decrease happened reducing it to 3.25%.
Prime rate changes in 2021
The rate remains at 3.25% until March 17, 2022.
Prime rate changes in 2022
The aftermath of the pandemic in the economy reflects in the fluctuation of the prime rate in 2022. It quickly increases from 3.25% to 5.50%. The rate increased to 3.50% in March. Then it continues to increase to 4% in May. 4.75% in June. Then 5.50% in July.
What Triggers the Prime Rate to Fluctuate?
The prime rate is determined by the Federal Reserve, the central bank of the United States, and based on the Federal Fund Rate. The Federal Fund Rate is the interest rate that the financial institutions charge on each other when one borrows from another. The prime rate is determined as 3% higher than whatever the current federal fund rate is. For instance, if the federal fund is 1%, 3% will be added to determine the prime rate. Hence, 4% will be the prime rate.
If the federal fund rate increases, the prime rate will also increase. When the prime rate increases, so are the loan interest rates.
How Does the Prime Rate Affect You?
The prime rate determines loan interest rates. So, if you are planning to take out a loan for a non-emergency purpose, it’s a good practice to check the prime rate first. This will help you decide on whether to pursue the loan or wait a little longer as the interest rate may decrease soon. Aside from that, it also has a great effect on the economy. As the prime rate decreases, the economy flourishes. This is because low-interest rates allow business owners to get more funds to expand their business. This can also result in cheaper prices in the market because businesses do not struggle from paying high-interest rates.
Can The Future Prime Rates Affect your Current Loans?
If you take out a loan today payable for 5 years, will the prime rate in the next 4 years still affect your loan interest rate? It depends. If your agreement has a variable interest, then the future prime rate will affect the future interest rate of your current loan. This means that your interest rate will go up or down depending on the prime rate fluctuations.
It is best to pay loans as soon as possible to avoid getting stocked in paying high-interest rates. Plus, struggling to pay loans on time can have significant negative effects on your credit score. Note that a poor credit score leads to high-interest rates. Your credit score is one of the main factors to get the lowest interest rates on loans. So, keep it in excellent condition as much as possible.