Study Shows Mortgage Interest Rates Hit Historic Lows, Credit Card Rates Remain Near All Time High
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 hit their lowest point over the entire 25-year period just last month, at 2.8%. While 48-month auto loan interest rates are relatively low by historic standards at 5.2% (as compared to their all time low of 3.8% in Q2 of 2015), credit card interest rates are close to their high-water mark at 15.9% (with the all time high over 25 years of 17.1%, occurring in Q2 of 2019).
Our research has shown that total credit card debt has decreased over the course of the past year due to the economic effect of the pandemic, which is good news for consumers. However, the interest on that revolving debt remains disproportionately expensive for consumers who carry balances from month to month and is a source of financial strife for those who struggle to make minimum payments on that debt.
Interest rates charged for credit card, auto, and home mortgage loans show marked differences, however. The gap between interest rates charged for credit cards and these other popular consumer loans has actually doubled in magnitude, from a factor of approximately 1.5 to 3X in the past 25 years.
- 30-year fixed mortgage rates are at historic lows
- Auto loan rates have trended upward gradually since hitting a low in Q2 2015
- Credit card interest rates are near all-time highs
Why Interest Rates Differ So Much by Loan Type
Credit cards traditionally carry the highest interest rates primarily because they are unsecured loans, i.e. not secured by actual physical assets. Even though defaulting on a credit card loan will damage one's credit there is no collateral that will be seized if payments are not made. Higher historical delinquency and charge-off rates therefore make credit card loans more expensive for lenders, as they offset those costs through higher interest rates passed on to consumers, These factors, along with the short-term and variable nature of revolving credit card loans, drive this interest rate differential compared to mortgage and auto loans that are longer term, feature fixed payments and are secured by tangible assets.
While both new automobile and mortgage loans can involve borrowers missing payments and going into default, the repossession or foreclosure of the loan collateral helps mitigate the related losses. Another factor that tends to keep secured loan interest rates lower involves securitization, which entails lenders packaging and selling bundles of auto and mortgage loans to investors. This securitization of loans transfers the risk liability from lenders to institutional and sometimes individual investors. Credit card receivables (outstanding balances held by account holders) are also sometimes securitized by issuers but generally to a much lesser extent compared to mortgage and new car loans.
An additional factor reducing the risk and cost of mortgage loans is the influence of federally-backed mortgage loans offered through the government-sponsored enterprises of Fannie Mae and Freddie Mac. Neither organization originates mortgage loans directly but both purchase and guarantee mortgages from originating lenders in the secondary mortgage market to provide access to qualifying low and medium income Americans in order to promote homeownership.
Those who suffer most from the highest cost form of credit: People making only minimum payments on credit cards or not paying their balances in full. These debtors can find themselves in never-ending cycles of high-interest credit card debt–especially if they need to make monthly payments on other types of debt obligations (despite their lower interest rates), such as student loans, mortgages or auto loans.
The Bottom Line
Historically low interest rates for mortgages and new car loans have been driving unprecedented loan demand in recent years, particularly on the new home purchase front, driving up home prices in many parts of the country. Auto loans were expected to suffer during the pandemic but surprisingly showed strong growth in spite of lower commuting, leisure and vacation-associated driving needs.
Credit card interest rates have remained dramatically higher over time relative to other loan types, largely due to the unsecured and transactional nature of that type of revolving loan product. While fewer total card balances are subject to interest than in the recent past due to decreased spending and the impact of stimulus payments, growing numbers of consumers will likely find themselves at the mercy of high credit card interest rates in the coming year. This could happen as increased demand for goods and services becomes unleashed as the pandemic subsides, inevitably driving higher card spending and revolving balances.
Historical interest rates over the period of Q1 1995 and Q1 2021 were statistically sampled by the Federal Reserve Bank of St. Louis (FRED) for credit card accounts assessed interest, 30-year fixed rate mortgage loans and 48-month new automobile loans utilizing credit reporting agency data.