Why might it seem that car rental rates in Mexico are astonishingly low, sometimes advertised as around $7 per day?

Here's the quick answer:
The crux of the matter rests within Mexican legislation, which does not require car rental companies to include the cost of mandatory insurance in their initial online price quotes.

At face value, this practice could be deemed justifiable. However, the reality is that the car "insurance" costs imposed at the rental counter are not only exorbitantly high but also non-negotiable. We have personally seen the insurance at an additional $50 to $70 per day, depending on the vehicle.

Adding to the frustration, these companies typically refuse to accept the auto insurance coverage provided by many credit card companies, a fact often not disclosed until the moment of pick-up. In the event that a customer declines to accept these additional insurance charges, the rental companies are known to retain the prepaid rental fees without offering refunds. This policy leaves many customers in a predicament, facing unexpected charges and the potential of not having a vehicle, despite having made a reservation and payment in good faith. Such practices underscore the importance of thorough research and understanding of all terms and conditions before renting a car in Mexico.

See what Travel Blogger, Nate Hake of "Travel Lemming" has to say about the matter: