Your guide to car loans: How to refinance or pay off your car loan faster
Millions of people are preparing for higher car payments and are concerned about the risk of falling behind in 2025. In this article we’ll be learning practical ways to refinance, pay off your loan early, or get out of a tough auto loan so you can keep more money in your wallet. If you’re interested in facts on Fuel or have a fleet of cars check out how to choose a fuel card.
Introduction: A friendly look at the 2025 auto-loan crisis
In the future, car payments are only going to get higher, especially by 2026. After the 2020 supply chain crisis disrupted the market, car prices remain very high, and loan interest rates haven’t changed. More and more buyers are opting for six- and seven-year loans just to afford a car. After mortgages, car loan debt is the second-largest household debt, totaling 1.66 trillion. Now, 5% of auto loan borrowers are falling behind on payments, and late payments are increasing across all credit backgrounds. That’s why we’ve created this guide. We want to help you cut through the confusion, understand the factors that drive loan payments so high, and explore the refinancing options available. We will offer practical tips for paying off car loans, and if you feel stuck, we will offer trusted resources and tools to help you. We want to have you take control of your future by providing you with the right information and the right plan of action.
The 2025 auto‑loan reality
Rising payments, longer loans, and worsening delinquency
This has pushed monthly payments to a record high:
- The average monthly payment continues to rise. As of 2025, Experian noted that monthly payments on new vehicles averaged $745, up from $661 in 2023. A payment of $521 is considered the average for used cars. Longer terms are now standard as sellers add more expensive units to their portfolios.
- The auto loan balance is now $1.66 trillion, as noted in the New York Fed’s report from Q2 2025. For the first time, auto loans have outpaced credit cards and student loans, making them the second-highest-cost consumer debt category, just behind mortgages.
- Delinquency is also increasing, as noted by YCharts: approximately 5.02% of auto loans in Q3 2025 were 90+ days overdue, well above the average. The Liberty Street Economics Blog from the Fed has noted that the increase in delinquency is occurring across all credit tiers; the serious delinquency rate for the 620-679 credit score range has essentially doubled from about 2% in the pre-pandemic period to around 4%.
- Longer loan terms are common now: Seven-year loans used to be rare but now account for nearly 20% of new vehicle financings. Stretching out a loan from five years to seven years decreases monthly payments, but increases the total interest on the loan, leaving borrowers “upside-down” for longer, meaning they owe more on the vehicle than it is worth. Our example shows how a longer-term loan can add thousands of dollars in interest.
Although these numbers can seem intimidating, they also represent potential new opportunities for savvy borrowers. Understanding how loans work and using strategies such as refinancing or an early payoff can help protect against financial hurdles.
How do car loans work?
To make informed decisions about the pros and cons of refinancing or paying off car loans early, an understanding of the general terms of auto financing is imperative. A summary of them is as follows:
Principal: The amount to be paid off on the purchase of a car, after deducting the down payment and the trade-in value.
Interest rate and APR: An interest rate is the price of money, expressed as a percentage of the principal, paid yearly. This, however, differs from the APR, which is the annual percentage rate, as it includes the interest rate and any other fees. According to Experian, in the 2nd quarter of the year 2025, the average APR for new car loans was 6.80%, while for used car loans, it was 11.54%. This, however, depends on the individual’s credit score. An individual with a good credit score, in the range of 781 to 850, would have an average interest rate of 5.27%. In contrast, an individual with a low credit score would have a higher interest rate, above 13%.
Term: The time period the borrower has to repay the loan. This duration is often 3 to 7 years (36 to 84 months). The longer the terms, the lower the monthly payments will be. This, however, increases the total interest paid and the duration the borrower will be, which is often termed ‘underwater’ on the loan.
Monthly payment: The monthly expenditure required to be paid, consisting of principal and interest. In most auto loans, the loan is amortized, meaning the interest is higher in the early months and decreases over time, while the principal increases.
There are still numerous supply chain disruptions, and new trucks and SUVs are still very popular. Therefore, car prices are still very high. To make matters worse, inflation is driving interest rates higher. Consequently, consumers will have to pay more each month on their car loans. When prices, and especially when interest rates rise, it can seem like the only way to keep monthly payments affordable is to choose longer loan terms. However, there are multiple unexpected consequences from this decision. As we will discuss in more detail in the following sections, this choice can sometimes backfire due to additional costs over the life of the loan.
Here is a very simple example to show how the length of a loan term affects the monthly payment and the total interest of the loan. Let’s say you borrow $30,000. The interest rate is 6.5% fixed for a year. The chart below shows the 5-year and 7-year loan terms. You can see monthly payments and total interest for each.
| Loan term | Monthly payment* | Total interest paid* | Notes |
| 5 years (60 months) | ~$586.98 | ~$5,219.07 | Higher monthly payment but you become debt‑free sooner and pay less interest overall |
| 7 years (84 months) | ~$445.48 | ~$7,420.58 | Lower monthly payment but you pay about $2,200 more in interest and stay underwater longer |
*These amounts assume a $30,000 principal at 6.5 % APR. Your rate may differ based on your credit score and lender.
Is refinancing right for you?
Refinancing means replacing your current auto loan with a new one, ideally with a lower interest rate or better terms. The goal is to lower your monthly payment or save a lot of interest over the life of your loan.
When can you refinance a car loan?
You cannot refinance a car loan right after you purchase a car. Typically, lenders look for the following criteria:
- Many lenders do not refinance older cars and instead set a threshold of 8 to 10 years or less. If that’s the case for you, make sure your car meets the requirements.
- Most lenders do not refinance unless you owe more than a certain amount, such as $5,000. If that’s the case for you, lenders may not want to refinance.
- The borrower should have a stable credit score that is higher than when he or she first took out the loan. This can happen when the borrower pays bills on time and effectively manages their credit.
- Several lenders want you to have made at least 6 payments, and to not be too close to the end of your loan term. If you have made very few payments and it is early in your loan period, the chance of saving money may be very low.
How to refinance step‑by‑step
- Review your current loan. Find out your payoff amount, interest rate, remaining term and whether your loan includes prepayment penalties.
- Check your credit and shop for rates. Use your most recent credit score and compare offers from banks, credit unions and online lenders. NerdWallet’s Q2 2025 data shows that borrowers with excellent credit paid around 5.27% APR on new‑car loans, while subprime borrowers paid over 13%. If your credit score improved since you originally financed your car, you may qualify for a much lower rate.
- Apply and look for fees. Submit applications (many lenders allow prequalification without a hard credit pull). Watch for application or origination fees, and ensure your new loan doesn’t have excessive prepayment penalties.
- Complete the refinance. If approved, your new lender will pay off your existing loan. Continue making payments to the old lender until you receive confirmation of the payoff to avoid accidental late fees. Then start payments on your new loan.
FAQ – refinancing
What rate is good for a car loan?
This varies based on the vehicle’s age, market conditions, and credit score. According to nerwallet.com, average rates for the second quarter of 2025 are about 6.80% for a new car and 11.54% for a used car. Based on this, a rate below average would be considered good. However, super-prime borrowers tend to get rates close to 5%. Hence, it is advisable to use a loan calculator to determine how low rates and different terms affect the total cost of the loan.
Can you refinance a car loan?
Yes. As long as the age and mileage of your car are good, your credit has not gone bad, and your existing loan balance is enough for your lender, you should be able to get a loan. There are many potential lenders that let you apply for a loan and get a quick decision online.
How to refinance a car loan with bad credit?
If you still have a low credit score, then a credit union is probably your best bet, and a co-signer would help you get a better rate. This guide will focus on strategies that better help borrowers with bad credit, but it should be noted that refinancing with bad credit will likely not improve your rating. However, if you extend the loan term, your monthly payments will likely decrease. Just keep an eye on the total interest you will pay over the course of the loan.
How to pay off your car loan faster
Being able to pay your car loan off early can free up cash for other budget expenses, avoid the risk of being underwater on your loan, and save you hundreds, if not thousands, in interest. Here are a few things to consider.
- Bi-weekly payments
Instead of making one monthly payment, paying half your monthly payment every two weeks can save you interest and help you pay down your loan more quickly. You will essentially make one extra payment each year with this strategy. Consider making bi-weekly payments to save interest.
- Round up or pay a little bit extra
When loans are paid down quickly, the interest on the loan will also decrease. If your payment is $350, consider paying $400 or even $450. This difference in payments reduces the amount of debt owed on the loan and also helps save on interest. Make sure to tell the bank that the extra amount will be applied to the principal. This will eliminate the risk that the payment will be counted as due for the following month.
- Refinancing to a shorter term
One way to save on a loan is refinancing to a shorter loan term, e.g., going from a 7-year loan to a 4-year loan. This is a good choice if you can afford higher monthly payments. This also reduces the interest you have to pay. Many credit unions offer lower interest rates than banks. In March 2025, the National Credit Union Administration (NCUA) stated that the national average interest rate on a new 60-month car loan was 5.86% for credit unions and 7.51% for banks. This can save people thousands if you are refinancing to a new, lower rate.
- Make lump-sum payments
You can also save on loans by making payments that exceed the required installment amount. This is called a lump-sum payment. Windfalls, such as a tax refund or a work bonus, are a good way to make a lump-sum payment. NerdWallet recommends making large lump-sum payments whenever possible, directly to the principal. Making a large payment is a good way to reduce the remaining principal and shorten the loan term.
Example of savings from paying early
Let’s say you have a $30,000 loan at 6.5% for a 7-year term. You also have a required monthly payment of about $445.48. This is the loan payment breakdown: if you pay $50 more than the required payment, you will pay off the loan about a year earlier and save on interest. To calculate the interest saved on a loan, you can use a loan payoff calculator. This is also the best way to see the precise savings on your loan.
FAQ – paying off early
How can I pay off my car loan faster?
If you’d like to pay off your car loan faster, you can make an extra payment every so often, switch to a shorter loan term, or make your payments every two weeks instead of once a month. Just make sure you don’t miss or be late with payments.
Can I pay off a car loan early?
Most lenders let you pay off loans early with no extra fees, but check your loan for potential prepayment penalties. Call or check your loan details online to know what to expect if you make extra payments.
Should I pay off my car loan early?
If your auto loan interest rate is high, you should definitely pay it off early. If your loan has a lower interest rate, it may be better to invest your extra money, especially if you have high-interest loans, and then focus on paying off those loans dfirst.
What to do if you’re struggling – getting out of a car loan
If you’re behind on payments or foresee trouble ahead, it’s critical to act quickly. Falling into severe delinquency can lead to repossession, late‑fee spirals and credit damage. Here are your options:
- Talk to your lender
Reach out as soon as you anticipate trouble. Many lenders offer hardship programs such as payment deferments or modified payment plans. InCharge Debt Solutions notes that simply asking your lender for help can prevent repossession and may result in a lower interest rate or extended term. Don’t wait until you’ve missed several payments—communication is key.
- Refinance or extend the term
Refinancing can lower your monthly payment by securing a lower rate or extending the term. However, extending the term increases the total cost of the loan. Carefully weigh the trade‑off between lower monthly bills and paying more interest over time.
- Sell or trade the vehicle
If your car is worth more than what you owe, selling it or trading it in can eliminate the debt. InCharge emphasizes that selling privately often nets 15–25% more than a trade‑in, but both options can work. Be sure to obtain payoff information from your lender and transfer the title properly.
- Use home equity or personal loans
Home equity loans or lines of credit typically have lower rates than auto loans, but they put your home at risk if you can’t repay. Consider this option only if you’re confident in your ability to make the payments and have a plan to reduce your overall debt.
- Voluntary surrender (voluntary repossession)
If you can no longer afford the car and owe more than it’s worth, you can voluntarily return it to the lender. This option still damages your credit but may be less detrimental than involuntary repossession, and you avoid towing and storage costs. After surrendering the car, you’ll still owe the difference between the loan balance and the sale price, plus fees.
FAQ – getting out of a loan
How do you sell a car with a loan?
Obtain a payoff quote from your lender, sell the car (or trade it in), pay off the balance and complete title transfer. If the sale price is less than the loan balance, you’ll need to pay the difference or roll it into your next loan.
How do you get out of a car loan?
You can refinance, sell or trade the car, use savings to pay off the balance, negotiate with your lender or, as a last resort, pursue voluntary surrender. Avoid defaulting, as repossession severely damages your credit.
Getting a car loan with bad credit – what you should know in 2025
Higher interest rates and tighter underwriting make it harder to secure an affordable auto loan if your credit score is low. However, several strategies can help you qualify or reduce the cost:
Why it’s harder now
The combination of elevated interest rates and stricter lender requirements means subprime borrowers face rates above 13% for new cars and over 18% for used cars. Additionally, lenders have increased income and credit history requirements because delinquency rates have risen across all borrower segments.
Strategies for securing an affordable loan
- Shop credit unions and community lenders: Credit unions are not‑for‑profit cooperatives that typically offer lower rates and may be more forgiving of lower credit scores. Investopedia notes that credit union auto loans often have interest rates more than 2 percentage points lower than bank rates and may have fewer qualification requirements. The NCUA’s data for March 2025 shows that a 60‑month new‑car loan averaged 5.86 % at credit unions vs. 7.51 % at banks.
- Work with a co‑signer: A trusted family member or friend with good credit can co‑sign your loan. Doing so reduces the lender’s risk and may result in a lower rate. AutoInsurance.com recommends considering a co‑signer or increasing your down payment if your credit is poor. Remember that your co‑signer becomes equally responsible for the loan, so make sure you can keep up with payments.
- Save for a larger down payment: Putting down more money reduces the loan amount and the lender’s risk, often leading to a lower rate. A larger down payment also helps you avoid being upside‑down and reduces monthly payments.
- Consider shorter loan terms: Lenders may offer better rates for shorter terms. While the payment will be higher, you’ll pay less interest over time. Use a loan calculator to see what you can afford.
- Improve your credit before applying: Pay bills on time, reduce credit card balances and avoid opening unnecessary accounts. AutoInsurance.com suggests catching up on late bills and working with a credit counselor if necessary. Even a small improvement in your score can reduce your rate.
- Compare multiple offers: Don’t settle for the first offer you receive. Websites like LendingTree and NerdWallet can show you rates from banks, credit unions and online lenders. Prequalify with several lenders to find the best deal.
FAQ – bad credit loans
What is a bad credit score for a car loan?
FICO defines scores below 580 as “poor.” However, lenders have different thresholds. Borrowers with scores below 620 typically face higher rates.
Where can you get a car loan with bad credit?
Credit unions, online lenders and “buy here, pay here” dealers may offer loans to subprime borrowers. Dealer financing often has very high rates, so compare offers carefully.
Should you wait to buy a car if you have bad credit?
If possible, yes. Improving your credit could save you thousands in interest. But if you need a car now, reduce costs by buying a cheaper used vehicle, securing a co‑signer or making a larger down payment.
Common questions – FAQ section
The following contains responses to frequently asked questions about auto loans and refinancing. We suggest using structured data FAQ markup on your site for this content to improve SERP features for your questions and answers.
What is the current rate for a good car loan?
According to Experian data for the second quarter of 2025, a new-car loan will cost you an average of 6.80%, and a used-car loan, 11.54%. Rates are relatively broad. For someone with excellent credit, the rate will be below 5%. However, someone with a subprime credit and a history of defaulting will pay over 13%.
What is the average car payment for a month?
According to Experian data, the average payment for a new car in 2025 is about $\textbf{745}$, and the average repayment for a used car is about $\textbf{521}$. The payment amount will depend on the car, including the price, down payment, loan rate, and loan term.
How does a car loan work?
A car loan is an installment loan that amortizes over a fixed term. The loan payment includes interest and a portion of the principal for the loan term. The interest rate accrued is determined by the borrower’s credit score, the loan duration, and the risk the lender is willing to take. The lower the score and the longer the term, the higher the risk and the rate.
Can I refinance or pay off my car loan early?
Yes. If your credit has improved or if market rates have dropped, refinancing can lower your interest rate or your monthly payments. Paying off your loan early by making extra payments or refinancing into a shorter term will save you interest. Make sure to check whether your contract has any prepayment penalties before paying off your loan early.
What are the risks of long-term loans or falling behind on payments?
The risks of long-term loans are that interest will accrue over time, potentially causing the overall amount due to exceed the original loan amount. There is also a greater risk of upside on the loan, or of falling behind or defaulting on it altogether. There have been record numbers of delinquencies and loans falling behind across all borrower groups. If you foresee problems making loan payments, please contact your lender immediately to discuss refinancing options or selling your car.
Final thoughts – smart moves in a risky market
Due to the high cost of vehicles and higher interest rates, automotive loans in 2025 are going to be more complex than in 2024. While some might be distressed by monthly payments, it’s important to consider the total cost of ownership. With that in mind, let’s go over tips to ponder before making a purchase.
First, compare interest rates. Before choosing a lender, be sure to compare interest rates and offers and read the fine print. You could end up saving a lot on the total cost of the loan, in some cases, thousands of dollars, just because of a small interest rate difference.
Then, try to avoid loans lasting 7 to 8 years. While it might make more sense in the short term to get a loan of that length, it will cost more in the long run. Loans of this length also run the risk of owing the loan longer than the vehicle will be used, which could, in fact, be much longer than most are expecting.
After this, use vehicle loan calculators and budgeting apps to better understand what you can afford. It’s also very important to keep in mind, when choosing a vehicle, that the total cost of ownership includes insurance, maintenance, and fuel.
Lastly, if you are within the first contractual year of your loan, it’s a good idea to determine if there is a clause in your contract that allows you to refinance under a new loan that has a better interest rate. It’s also a good idea to determine the procedure and whether there are any penalties for making extra payments every 2 weeks. It’s better to refinance the loan if your credit score has improved in the meantime, as interest rates might go lower if you are in the first year. Most people don’t realize that simply making those extra payments can save a lot of money on interest.
If you face trouble, contact your lender, consider selling or trading your car, and avoid default. Voluntary surrender should be a last option, but it’s better than repossession.
At The Growth Operative, we write content geared to help you keep your business profitable and anticipate market changes that might affect your growth. If you’re an entrepreneur or aspire to be one, explore how we can help you achieve that goal. As for the auto industry, keep the car payment and interest in mind before committing to a car loan in today’s climate. Once you decide which car you want, make sure you get a loan calculator before you sign anything. Compare at least three offers and look at the long-term cost rather than just the monthly payment. This will help you mitigate the risk that the car loan detracts from the overall enjoyment of your new purchase. For more tips and insights on financially managing, credit building, and making smart money decisions, follow The Growth Operative. We want to help you financially, so we’ve provided a ton of helpful resources, from the more complex like this one to quick side-hustle recommendations. We want to help you achieve Financial Freedom.