Interest trends for card, car, and mortgage loans

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Study shows that mortgage rates have hit historic lows and credit card rates remain near all-time highs

The Federal Reserve Bank of St. Louis tracks interest rates over the 101-quarter period between Q1 1995 and Q1 2021 and has shown that the 30-year mortgage rate was 2.8 just last month. have bottomed out over the entire 25-year period%. While interest rates on 48-month auto loans are relatively low by historical standards at 5.2% (compared to their all-time low of 3.8% in the second quarter of 2015), credit card rates are close to their high of 15.9% (at the all-time high over 25 years of 17.1% in the 2nd quarter of 2019).

Credit card debt has decreased overall over the past year due to the economic impact of the pandemic, which is good news for consumers. However, the interest on these revolving debts remains disproportionately expensive for consumers with month-to-month credit and a source of financial trouble for those who struggle to make the minimum payments on these debts.

However, the interest rates on credit card, car, and mortgage loans vary significantly. The difference between credit card interest rates and these other popular consumer loans has doubled from a factor of about 1.5 to three times over the past 25 years.

The central theses

  • 30-year fixed-rate mortgage rates at an all-time low
  • Auto loan rates have been trending gradually higher since their lowest point in the second quarter of 2015
  • Credit card rates near all-time high


Why the interest rates are so different depending on the type of loan

Credit cards have traditionally earned the highest interest primarily because they are unsecured loans, that is, not secured by actual physical assets. Even if a credit card loan default affects creditworthiness, there is no collateral to be attached if payments are not made. Therefore, higher historical default and withdrawal rates make credit card loans more expensive for lenders as they offset these costs with higher interest rates that are passed on to consumers. These factors, together with the short-term and variable nature of revolving credit card loans, secures this interest rate differential over longer-term mortgage and auto loans at fixed rates and in kind.

While both new auto and mortgage loans can cause borrowers to miss payments and default, repossession or foreclosure of the loan collateral will help mitigate the associated losses. Another factor that tends to keep the interest rate on secured loans lower is securitization, in which lenders bundle auto and mortgage loans and sell them to investors. This securitization of loans transfers the risk liability from the lenders to institutional and, in some cases, individual investors. Credit card claims (outstanding balances from account holders) are sometimes also securitized by issuers, but generally to a far lesser extent than mortgage and new car loans.

Another factor that reduces the risk and cost of mortgage loans is the impact of government-sponsored mortgage loans offered by the US government-sponsored corporations Fannie Mae and Freddie Mac. Neither organization directly issues mortgage loans, but rather buys and guarantees mortgages from original lenders in the secondary mortgage market to provide access to skilled low- and middle-income Americans to promote home ownership.

Those who suffer most from the highest cost form of credit: people who make minimal payments with credit cards or who fail to pay their balance in full. These borrowers can find themselves in endless cycles of high-interest credit card debt – especially when they have to make monthly payments on other types of debt (despite lower interest rates) such as student loans, mortgages, or car loans.

The bottom line

Historically low interest rates on mortgages and new car loans have resulted in unprecedented credit demand, particularly for new home purchases, in recent years, which has driven home prices soaring in many parts of the country. Car loans were expected to suffer during the pandemic, but have grown surprisingly despite the reduced need for commuting, leisure, and vacation related to driving.

Credit card rates have remained dramatically higher over time compared to other types of credit, largely due to the unsecured and transactional nature of this type of revolving credit product. While there is less interest on the card than in the recent past due to lower expenses and the effects of stimulus payments are likely to see more and more consumers at the mercy of high credit card rates in the coming year. This could happen if as the pandemic subsides, increased demand for goods and services is unleashed, inevitably leading to higher card spending and revolving credit.

methodology

Historic interest rates for the first quarter of 1995 and the first quarter of 2021 were determined by the Federal Reserve Bank of St. Louis (FRED) for interest-bearing credit card accounts, 30-year fixed-rate mortgage loans, and 48-month new auto loans using loans statistically examines data from the reporting office.

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