What Is the Prime Rate?

The prime rate, sometimes called the prime interest rate or prime lending rate, is the rate at which banks lend funds to their most creditworthy customers. It typically follows the federal funds rate, which is set by the U.S. Federal Reserve.

Banks use the prime rate as a starting point to help determine the range of interest rates for the different products they offer. Interest rates can vary depending on the type of loan or credit, as well as factors such as creditworthiness.

Let’s discuss the prime rate, including how it’s set and what it can and can’t affect.

How is the prime rate set?

The prime rate is typically the federal funds target rate (the interest rate at which banks lend each other money overnight), plus an additional percentage. In general, it’s roughly the federal funds rate, plus 3 percentage points. For example, if the federal funds rate is 3%, the prime rate would be around 6%.

That said, each bank determines its own prime rate, which is one of the reasons interest rates can vary by institution.

How has the prime rate changed over time?

The prime rate has fluctuated quite a bit over time. For example, at the end of 1980, the prime rate rose to a record-setting high of 21.5%. In 2020, when the Fed cut interest rates to near 0%, the prime rate fell to 3.25%. In August of 2025, the prime rate was 7.5%.

Changes to the prime rate are generally in response to economic changes. For example, the Federal Reserve typically cuts interest rates when employment or inflation is too low, and vice versa. Those cuts (or hikes) can lead to similar changes in the prime rate.

What can the prime rate affect?

The prime rate can affect interest rates for a variety of financial products, including:

• Credit cards
• Personal loans
• Home equity lines of credit (HELOCs)

Keep in mind that this applies to new loans and products, but it may apply to existing ones as well. If you have a variable-rate product that uses the prime rate as a benchmark, such as a credit card, the rate on that account can fluctuate over time, particularly if the federal funds rate changes.

Some products can also be influenced by the prime rate even though they aren’t directly linked to it. For example, banks may choose to boost their rates on savings accounts when the prime rate increases to attract customers.

What loans aren’t impacted by changes in the prime rate?

Existing loans with fixed rates are not typically affected by changes in the prime rate. This is because fixed interest rates are generally designed to stay the same throughout the life of a loan or product. For example, if you have an existing fixed-rate mortgage, the rate will not change when the prime rate changes.

If the prime rate isn’t the benchmark for the loan, then the prime rate may not affect the interest rate. For example, some banks may use a different interest rate, such as the Secured Overnight Financing Rate (SOFR) rate, for certain products like adjustable-rate mortgages.

Although it isn’t always a key factor, the prime rate can have a significant impact on many of the financial products in your life. Now that you understand how it works, you can use that context to help you find the lowest available rates on different types of credit in the future.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.