During the past year, mortgage payments took precedence over other debt payments, as the home became an essential place for Americans to work, educate their children, and stay safe during the pandemic.
According to a study of people who have those three types of debt conducted by TransUnion, the consumer credit reporting organization, mortgage payments had the lowest rate of 30-day delinquencies in the third quarter of 2020, followed by vehicle loan payments and credit card payments.
TransUnion looked at accounts 30 days late on payments, which is usually the first symptom of financial trouble. For the 27.8 million customers who held all three types of credit, mortgage loans had a 30-day past-due rate of 0.75 percent, followed by car loans at 0.75 percent and credit cards at 1.95%.
According to Matt Komos, TransUnion’s head of research and consulting in the United States, “the vehicle loan has been quite essential to people at times because they require a car to get to work.” In addition, credit cards were emphasized over mortgages after the housing crisis, during the last recession, when homes lost so much value.
However, the pandemic has created a unique set of circumstances, according to Komos. This year, the home has become so vital to so many individuals, according to Komos. If they kept their jobs, they might now be working from home and homeschooling their children, and they want to be sure they have a safe place to be.
While paying the mortgage has been a priority since 2017, rising housing prices and a steep increase in the cost of living have made it more difficult.
Why Do Interest Rates Vary Depending on Loan Types?
Credit cards have traditionally carried the highest interest rates because they are unsecured loans; that is, tangible physical assets do not secure them. Therefore, even though failing to make payments on a credit card loan will harm one’s credit, no collateral will be seized if payments are missed. In addition, higher historical delinquency and charge-off rates make credit card loans more expensive for lenders, as higher interest rates offset those costs passed on to consumers. These factors and the short-term and variable nature of revolving credit card loans contribute to the interest rate differential compared to mortgage and auto loans, which are longer-term, have fixed payments, and are secured by tangible assets.
While both new car and mortgage loans can result in borrowers’ missing payments and default, repossession or foreclosure of the loan collateral helps mitigate the associated losses. Securitization, which involves lenders packaging and selling bundles of auto and mortgage loans to investors, is another factor that tends to keep secured loan interest rates low. Loan securitization transfers risk liability from lenders to institutional and, in some cases, individual investors. In addition, issuers sometimes securitize credit card receivables (account holders’ outstanding balances), but to a much lesser extent than mortgages and new car loans.
Interest Rates on Cards
The average credit card APR varies greatly depending on the card type. For example, credit cards may have higher average APRs to compensate for additional benefits rewards. In addition, because most credit cards have a variable APR based on your creditworthiness, we also looked at low and tall figures.
Lower APRs are typically reserved for customers with excellent credit.
The Federal Reserve collects data on the APRs of credit cards issued by commercial banks to American consumers, including data from non-reward and retail credit card accounts. These figures are broken down into two categories: interest rates on all credit card accounts and interest rates on interest-bearing accounts.
Credit card APRs have been relatively stable over the last decade, with only minor fluctuations of a few percentage points since 2010.
The penalty rate, also known as the default rate, is the APR you may be charged if you fail to make on-time payments in the future. This penalty rate is frequently much higher than the initial APR offered on your credit card.
Companies are only permitted to raise APRs under the CARD Act if you are 60 days late on your payments during the first year of your account. Depending on your credit card company, several other factors, such as exceeding your credit limit or defaulting on another account with the same issuer, may also result in penalty rates.
However, if your account is more than a year old, issuers may raise your rate for any reason. In our credit card survey, the penalty APR was generally determined by the card issuer. The federal government does not cap the maximum allowable APRs.
If you have good credit, penalty APRs can be more than 15 percentage points higher than what you were initially offered on your card. So it’s sound advice to pay your credit card bills on time at all times.
Mortgage Loan Interests
In 2017, the national average mortgage interest rate for borrowers with good credit on a 30-year fixed-rate loan was 4%. The interest rate you will pay is primarily determined by the type of mortgage you obtain, the term length of the loan, and your credit score. While mortgage interest rates vary by state, the differences are usually minor. The most common mortgage loans are 15- and 30-year fixed-rate mortgages, which offer a fixed monthly rate for the life of the loan, and 5/1 hybrid adjustable-rate mortgages, which have a fixed rate for the first five years and then adjust annually.
FHA loans are designed for lower-income consumers; VA loans, which are intended for veterans; and interest-only mortgages, which allow the borrower to pay only interest for the first few years, reducing their monthly payment. FHA and VA loans are government-backed, but interest rates for these mortgages can vary depending on the market and the borrower. Check out our complete mortgage payment analysis here for more information.
Interest on Auto Loans
The national average interest rate on auto loans typically ranges between 3% and 10%. Loan terms vary, but the average length of an auto loan reached a record high of 69.3 months in 2017. The 2017 average auto loan interest rate for a new car was 4.28 percent, based on a 60-month loan and a borrower’s credit score of between 690 and 850. Interest rates vary depending on the consumer’s credit score, the length of the loan, whether the car is used or new, and other factors related to the risk of lending to a specific consumer.
Auto loan interest rates as low as 2% may be offered to consumers with credit scores above 690, though average speeds range from 3% to 5%, depending on credit score. Borrowers with lower credit scores may be charged interest rates that are five to ten times higher than those with the highest credit scores. Another factor influencing auto loan rates is whether the vehicle is new or used. Because of lower resale values and the higher risk of financing a potentially less reliable vehicle, used cars typically have higher interest rates than new vehicles.
Closure on These Loan Interest Rate Trends
The influence of federally-backed mortgage loans offered through the government-sponsored enterprises Fannie Mae and Freddie Mac is another factor lowering the risk and cost of mortgage loans. Neither organization directly originates mortgage loans, but both buy and guarantee mortgages from creating lenders in the secondary mortgage market to provide access to qualifying low- and middle-income Americans and promote homeownership.
Those who suffer the most from the most expensive type of credit make only minimum payments on their credit cards or do not pay their balances in full. As a result, these debtors may become trapped in never-ending cycles of high-interest credit card debt, especially if they also have to make monthly payments on other types of debt obligations (despite lower interest rates), such as student loans and mortgages, and car loans.
Historically low mortgage and new car loan interest rates have driven unprecedented loan demand in recent years, particularly for new home purchases, driving up home prices in many parts. Auto loans were expected to suffer during the pandemic, but they grew surprisingly well despite lower commuting, leisure, and vacation-related driving needs.
Credit card interest rates have remained significantly higher than other loan types over time, owing mainly to the unsecured and transactional nature of that type of revolving loan product. While there are fewer total card balances subject to interest than in the past due to lower spending and the impact of stimulus payments, an increasing number of consumers will likely find themselves at the mercy of interest.
These are purely the opinions of the author based on observations and analysis of financial platforms and a study of public reviews and ratings on interest rates offered for mortgage loans, auto loans, and loans on cards. Excerpts from various sources have been used to clarify the facts in this article. A glossary of all the sources used can be found at the end of the article. This article is for educational purposes only and is not financial advice.