Interest rate trends for card, auto and mortgage loans
Study Shows Mortgage Interest Rates Have Hit All-Time Low Levels, Credit Card Rates Stay High Almost All Times
By tracking interest rates over the 101-quarter period between Q1 1995 and Q1 2021, the Federal Reserve Bank of St. Louis has shown that 30-year mortgage interest rates have reached their highest point. low over the entire 25-year period last month, at 2.8%. While 48-month auto loan interest rates are relatively low by historical standards at 5.2% (from their historic low of 3.8% in the second quarter of 2015), interest rates on credit cards are near their all-time high of 15.9% (with their all-time high during the period of 17.1% occurring in the second quarter of 2019).
Total credit card debt has gone down over the past year due to the economic effect of the pandemic, which is good news for consumers. However, the interest on this revolving debt remains disproportionately expensive for consumers who carry month-to-month balances and is a source of financial conflict for those who struggle to make minimum payments on this debt.
However, the interest rates charged for mortgage loans on credit cards, cars and homes show marked differences. The spread between the interest rates charged for credit cards and these other popular consumer loans has actually doubled from a factor of about 1.5 to 3X over the past 25 years.
Key points to remember
- 30-year fixed mortgage rates are at historic lows
- Auto loan rates have been rising steadily since their trough in Q2 2015
- Interest rates on credit cards are almost unprecedented
Why interest rates differ so much depending on the type of loan
Traditionally, credit cards carry the highest interest rates mainly because they are unsecured loans – that is, unsecured by real physical assets. Even though defaulting on a credit card loan will damage one’s credit, no collateral will be foreclosed if payments are not made. Rising historical arrears and repayment rates therefore make credit card loans more expensive for lenders because they offset these costs through higher interest rates passed on to consumers. short-term and variable revolving credit card loans, this interest rate differential over longer-term mortgages and auto loans, with fixed payments and secured by tangible assets.
While new auto loans and mortgages can involve borrowers defaulting and defaulting on payments, the repossession or foreclosure of the loan collateral helps mitigate the associated losses. Another factor that tends to keep secured loan interest rates lower is securitization, which involves lenders package and sell lots of auto and mortgage loans to investors. This loan securitization shifts responsibility for risk from lenders to institutional and sometimes individual investors. Credit card receivables (outstanding held by account holders) are also sometimes securitized by issuers, but generally to a much lesser extent compared to new mortgages and auto loans.
Another factor reducing the risk and cost of mortgages is the influence of federally guaranteed mortgages offered by the government funded businesses of Fannie Mae and Freddie Mac. Neither organization issues mortgages directly, but purchases and guarantees mortgages from original lenders in the secondary mortgage market to provide access to qualifying low and middle income Americans to promote homeownership. .
Those who suffer the most from the most expensive form of credit: People who only make minimum credit card payments or do not pay their balance in full. These debtors can find themselves in endless cycles of high interest credit card debt, especially if they have to make monthly payments on other types of debt (despite their lower interest rates), such as student loans. , mortgages or auto loans.
Historically low interest rates for mortgages and new auto loans have led to unprecedented demand for loans in recent years, especially on the new home buying front, pushing up home prices in many areas. from the country. Auto loans were expected to suffer during the pandemic, but they have surprisingly shown strong growth despite declining needs for driving, recreation and vacationing by car.
Credit card interest rates have remained considerably higher over time compared to other types of loans, largely due to the unsecured and transactional nature of this type of revolving loan product. Although fewer total card balances are subject to interest than in the recent past due to decrease in expenses and the impact of stimulus payments, an increasing number of consumers will likely find themselves at the mercy of high credit card interest rates in the coming year. This could happen when increased demand for goods and services is unleashed as the pandemic abates, inevitably leading to increased card spending and revolving balances.
Historical interest rates over the period Q1 1995 and Q1 2021 were statistically sampled by the Federal Reserve Bank of St. Louis (FRED) for credit card accounts, assessed interest, fixed rate mortgages 30-year and new 48-month auto loans using credit reporting agency data.