Eli5 Why are they saying mortgage interest rates are at 7%? Wouldn’t your interest rate be based on your credit score like a car loan?
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They are, but they’re also based on where else someone can loan money out.
Basically, there’s a “prime rate”. This is the amount that the US borrows money at (slight oversimplification, I know); and because the US is basically guaranteed to pay back their debts, that’s the base line. If you aren’t guaranteed to pay back, you have to pay back a little bit more to compensate for the risk of you not paying back the money you borrow. The more likely you are to not pay the money back (which is measured by your credit score), the more you pay.
Now, there’s some exceptions to this. Home loans are sometimes lower than that because the bank knows that if you don’t pay back the loan, they can take the house and get at least some of their money back. Because of this, credit doesn’t necessarily matter as much (though it still does some), but it does matter. On the other hand, car loans risk something happening to the car (like you getting in an accident and being at fault) and them not being able to take it – and secondhand cars are less valuable anyway. So car loans see bigger rate changes based on your credit: both because you’re more likely to pay back the loan AND because people with better credit are more likely to take care of their stuff and therefore not get in an accident (side note: credit rating can play into insurance rates for these reasons too).
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