Prime Rate, LIBOR, etc.

Okay, as you head for college you may be hearing these terms thrown around. Don’t panic, they’re really pretty easy.

Prime Rate is the rate of interest charged by commercial banks to their most creditworthy borrowers. The Prime Rate is a benchmark for calculating many variable interest rates.

Many loans with variable rates are given in Prime+ terms. Prime +3 is the Prime Rate plus 3 more percent.

• Remember that Prime Rate is what banks offer their best (Prime) customers, and it’s rare for an individual borrower to get it. Individual borrowers should expect to get rates of Prime + 3, 4 or 5. Individual borrowers can sometimes get as little as Prime + 1% if they have good credit (and probably must pay a small origination fee too).

LIBOR (London Inter-Bank Offered Rate) is the interest rate at which banks lend to one another. It is also used as a reference point for the majority of overnight and/or future interest rate levels.

• LIBOR is typically 2 points less than Prime Rate.
• So LIBOR+5 and Prime+3 are about the same actual rate.
• You can also think of it (very roughly speaking) as LIBOR = Prime-2 or Prime = LIBOR+2.

Other: Other rate standards are seldom used directly for consumer loans. You may hear about the Federal Discount rate or the Fed Funds rate (also called the overnight rate) set by the Federal Reserve at its quarterly meetings. You may hear a lot about Treasury Bill (T-bill) rates and yields. They’re terribly important rates, but not for our purposes here. Heck, you’re off to college - go ask an econ major and you’ll get a whole lecture on 'em