Differences and Similarities Between Prime Rate and Discount Rate
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What Is the Prime Rate?
What the Prime Rate Does
Credit cards Personal loans Auto loans Student loans Mortgages Small business loans Home equity lines of credit
How the Prime Rate Is Calculated
Is the WSJ Prime Rate the same as Prime Rate?
What Is the Federal Discount Rate?
What the Federal Discount Rate Does
How the Federal Discount Rate Is Calculated
Tier 1 is for banks considered to be exceptionally financially strong. Think of tier 1 as the Fed’s version of prime rate. Tier 2 is for banks less strong than tier 1, but who are still considered to be in good financial health. Tier 2 borrowers usually pay 50 basis points more than tier 1 borrowers. Tier 3 is for smaller banks and lenders that have ebbs and flows to their business. Because they are riskier than other banks, they pay the most to borrow from the Federal Reserve.
Comparing Prime Rate vs Discount Rate
Both the prime rate and the federal discount rate represent the cost of borrowing If the discount rate goes up, the prime rate usually goes up too; if the discount rate goes down, the prime rate usually soon follows suit Both are influenced by economic conditions Both can either encourage or discourage borrowers from taking out a loan
The prime rate is affected by the federal funds rate, which is the rate the Fed suggests banks charge one another for loans The discount rate is used as a tool to combat inflation or stimulate the economy The prime rate is the rate that large corporations may receive if their credit history and income are strong enough The discount rate is the rate that the Fed charges banks for a loan as a lender of last resort
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