The average interest rate by debt type is important to know to utilize debt more efficiently. This article will look at the average interest rate for auto loans, credit cards, and mortgages.
We are an indebted nation thanks to our desire for more and our financial system’s ability to grant us more. When used appropriately, debt can help provide for a better life and make us wealthier. When used indiscriminately, however, debt can destroy our financial dreams.
Below is a list of the most indebted nations according to Trading Economics. Currently, America is at ~106% debt-to-GDP and historically ranged from a low of 31.7% to a high of 122%.
Whenever your country’s debt is greater than its GDP, it’s probably a good idea to encourage your politicians to exercise fiscal restraint lest they take your country to hell during the next financial crisis.
Notice how many of the most indebted countries such as Greece, Italy, and Portugal continue to struggle since the 2008-2009 financial crisis.
Let’s review the following types of consumer related debt and rank them from worst to best. We’ll also take a look at the latest interest rate by debt type.
Average Interest Rate By Debt Type
The average interest rate by debt debt is ranked from highest to lowest.
1) Average credit card interest rate.
The average APR on a credit card is 17% as of mid-2020. Some go as high as 29.99% if you’ve got terrible credit. This is such a ridiculously high interest rate which not even the annual returns of the great investor, Warren Buffet, can match.
If you carry a balance, credit card companies are ripping you off. They’re secretly hoping you spend more than you make or forget to pay off your balance each month. No Financial Samurai should ever have revolving credit card debt. Use a credit card for rewards points, insurance, a free 30 day loan, and concierge service, but that’s it.
I highly recommend reducing the time spent playing the 0% APR balance transfer game. Instead, focus on making more money instead. Don’t use the credit card as a crutch to support irresponsible spending habits.
2) Average interest rate for automobile debt.
Borrowing money to buy a depreciating asset is a really bad move. Some people justify their auto debt by saying it’s so low at 1.9% or whatever. But 1.9% is still too much when you’re losing money on a vehicle every month.
If you are able to spend 1/5 – 1/10th of your gross income on a car, then you shouldn’t have to go into automobile debt. If you buy a car that’s 1/5 – 1/10th your gross income and can get a 0% loan so you can invest the difference, then fine. Otherwise, just say no to automobile debt.
3) Average student loan interest rate.
The average student loan interest rate is about 4.5% heading into 2021.
The older I get, the more I realize how vitally important education is for achieving financial freedom and happiness. When you have the knowledge and skills to make things happen, life gets so much easier. That said, there’s nothing you learn in college that you can’t learn for free on the internet. Therefore, skyrocketing college tuition seems more like a scam, especially since higher tuition doesn’t guarantee you a well-paying job upon graduation.
Unless your family is rich, choose a college that provides enough free grant money so that you’ll be able to pay everything back within four years of graduation. I’m highly biased towards state schools having attended The College of William & Mary for undergrad and UC Berkeley for business school. You can deduct up to $2,500 of student loan interest paid in any given year if your modified adjusted gross income is under $80,000 or $160,000 for married couples filing jointly.
I suggest refinancing your student loan debt with Credible. Fill out your information and get real quotes from up to 10 qualified lenders all competing for your business. Credible is the easiest way to compare the best rates and lenders to make an informed decision.
4) Average mortgage interest rate.
The average 30-year fixed rate mortgage has plummeted to around 2.78%. The average 15-year fixed rate mortgage is 2.32%, which is the best bargain right now. And the average 5/1 ARM is at 2.89%.
Mortgage debt is considered the least egregious debt because it’s tied to an asset that historically appreciates. Not only that, the American government allows you to write off all mortgage interest on debt up to $750,000 plus the interest on $100,000 of a home equity line of credit.
The government allows for tax free profits of up to $250,000 for individuals and $500,000 for married couples if you live in your property for two out of the last five years. Finally, the government allows you to defer taxes by allowing you to use the sale proceeds to buy another property under the 1031 exchange program.
Bullish On Real Estate
Take a look at this US housing price chart. The clear trend is up and to the right with some cyclical downturns along the way. The gap in price performance between cities like Dallas / Houston and other major cities is one of the biggest reasons why I’ve been buying heartland real estate. With the remote work trend, technology, and strong job growth, I believe the spread will narrow.
You want to be on the right side of a tank, inflation, the Fed, and the government. The government is pro-housing so you might as well take advantage. You’ll want to pay off your mortgage before you no longer have the desire or energy to work. For those of you who’ve been waiting to refinance or take out a loan, now is probably time to inquire about the latest rates.
I recently refinanced my primary mortgage to a 7/1 ARM at 2.625%. Not only did I not pay to refinance my mortgage, I was given a $500 credit to refinance! It’s hard to believe I now pay 30% less a month to own my home than I did when I bought it in 2014.
Debt Is A Tool For Financial Freedom
For those who don’t have debt, I commend you for living so fiscally responsibly. The feeling was incredible when I paid off one of my rental property mortgages in 2015. Despite a further rise in the stock market since, I have no regrets.
But to shun debt completely when you’re still trying to build your financial nut is a sub-optimal move. If you can borrow for cheap and earn a greater return on your money, such arbitrage should be pursued until you have enough.
Wealth Building Recommendations
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Real estate is a key component of a diversified portfolio. Real estate crowdsourcing allows you to be more flexible in your real estate investments by investing beyond just where you live for the best returns possible. For example, cap rates are around 3% in San Francisco and New York City, but over 10% in the Midwest if you’re looking for strictly investing income returns.
Sign up and take a look at all the residential and commercial investment opportunities around the country Fundrise has to offer. It’s free to look.
Refinance Your Expensive Debt. Now that you know the average interest rate by debt type, you should highly consider refinancing your expensive student loan, mortgage, or credit card debt with Credible. Credible is a top lending marketplace that provides real quotes, all in one place. They have highly qualified lenders competing for your business. It is the efficient way to get the best deal out there.
Updated for 2021 and beyond.
ZJ Thorne says
Definitely agree with you on the rankings. Revolving debt not attached to an appreciating asset is deeply unpleasant.
Lily @TheFrugalGene says
“Borrowing money to buy a depreciating asset is a really bad move.”
This is such an easy concept to understand but I argue tooth and nail with peers who are absolutely stuck on having cars. I have lived in San Francisco for most of my life and I know for a fact that a car in San Francisco is not a necessity for those under 30 and without kids. I did the math over dim sum while my friend spent 20 minutes looking for parking in Chinatown. Basically a low/mid range car with expenses (gas, insurance, parking) cost at least $500/month — and that’s if you kept it for 10 years and paid for it in cash!
I rather have that $500 smackeroo in my pocket every month!
Ryan Schaap says
Just to clarify, you can only use a 1031 exchange for investment property. Therefore, if you’ve used a home as your primary residence you will need to establish your former residence as a rental property for a period of time before you can do a 1031 exchange. It is usually better to take advantage of the $500K or $250K exclusion that applies to personal residences assuming the requirements are met. Also, to deduct the $100K equity line, the loan proceeds are supposed to be used to purchase, maintain, or upgrade your home. It is not supposed to be used for consumer purchases like buying a car (at least if you want the interest deduction). However, money is fungible so try to make sure you can verify how the equity line was used in relation to your primary residence, even if you are buying other things at the time the loan is taken out. I’m not aware of much enforcement by the IRS regarding this issue, but you never know when they may target it as an area of abuse.