How to avoid a debt trap when buying a car in 2025
New car loans are stretching longer than ever. The average new-vehicle price now falls between about $40,000 and $50,000, and to make those amounts look affordable, many buyers are 7-year terms are the new normal. In fact, more than one in five new car loans now run 84 months.
The problem? On a $40,000 loan at around 8% APR, the monthly payment may seem manageable, but over seven years you would pay more than $12,000 in interest alone. That’s a steep premium just for spreading out payments. Here’s how to stay in control, cut down on unnecessary interest, and line up smarter options.
1) Keep your existing car longer if you can
Paying for a $2,000 repair can be far cheaper than taking on a new loan. Just the sales tax alone from registering a $35,000 new car could exceed that repair bill, and that’s before you even factor in the thousands of dollars in interest over the life of the loan. For example, on a $35,000 loan at 8% APR over 84 months, the monthly payment is about $545 and the total interest is about $10,823. Put another way, repairing your current car may cost less than the taxes and financing charges of replacing it.
2) Use the used EV tax credit if it fits your life
This year, buying a qualified used electric or plug-in hybrid vehicle from a dealer for $25,000 or less can unlock a federal tax credit up to $4,000 (30% of the sale price, capped at $4,000). Income limits apply, and the vehicle must be at least two model years old. In many case you can also choose to transfer the credit at the dealership to reduce the price at the time of sale.
Worried about range? Consider a plug-in hybrid (PHEV). You can drive on electricity for short trips, then rely on gasoline for longer drives. It is a practical bridge for buyers who want lower fuel costs without full EV charging dependence.
3) If you already have a large car payment, add extra to principal
Small extras make a big difference. Using the same $35,000, 8% APR, 84-month loan:
- Pay the scheduled $545/mo → about $10,823 in total interest, 84 months to finish.
- Add $100/mo → about $8,580 in interest, 68 months to finish. You save about $2,243 and finish 16 months sooner.
- Add $200/mo → about $7,120 in interest, 57 months to finish. You save about $3,704 and finish 27 months sooner.
Budge’s take: set an automatic “extra principal” line in your budget. We’ll remind you and help you adjust if income or expenses change. You can also use Budge’s free debt snowball calculator to help prioritize how to pay down your debt the fastest and cheapest way.
4) Let time be on your side
If your current car is safe and reliable, patience often pays. Inventory and incentives fluctuate. Month-end and quarter-end can bring more flexibility as dealers chase targets, and some models become better buys at certain times of the year. Google "best car deals [current month / current year]" to see what special offers are available at any given time.
5) Definitely check rates at your credit union
Credit unions are member-owned and often publish lower average auto rates than banks. As a benchmark, national data show credit unions with lower average rates for new and used car loans versus banks (for example, 60-month new-car loans were 6.40% at CUs vs. 7.21% at banks in a recent federal comparison). Get preapproved and take that offer to the dealership.
Why long terms are risky (quick context)
Stretching a loan to 72 or 84 months lowers the monthly bill, but it often means thousands more in interest and an extended stretch of negative equity. Negative equity means you owe more than the car is worth, which can trap you if you need to sell, trade in, or face an emergency.
How Budge keeps you in the driver’s seat
- See your options for paying down your debts with clear side‑by‑side comparisons.
- Prioritize what to pay first using Budge’s snowball and avalanche comparison tools.
- If you feel completely overwhelmed, connect directly through Budge with trustworthy providers who can guide you through solutions that could provide real relief.
