When it comes to auto loans, equity can save you thousands of dollars in interest costs.
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- New car prices will reach record numbers in 2025.
- The average monthly car payment is also increasing, but you can reduce it by using the “20% rule.”
- Car loan interest rates can cost car buyers thousands of dollars, depending on how the financing deal is structured.
Purchasing a car is one of the biggest purchases many Americans make in their lives. New car prices are at an all-time high, with the average price rising to nearly $50,000 by 2025, according to Kelley Blue Book.
When buying a new car in 2025, choosing the right financing strategy can have a big impact on your ownership experience and monthly payments. What is the “20% Rule” and how can you use it to buy your dream car, truck, or SUV?
What is the 20% rule for car loans?
By 2025, thousands of drivers will be financing the purchase of a new car. How you plan your finances will affect the amount of equity you have in your new car and the total monthly and annual payments, including interest.
A minimum down payment of 20% can keep the cost of your financing transaction low in the long run. According to Chase Bank, a down payment “reduces the loan principal and the interest you may pay.”
Let’s say you’re financing a new 2025 Toyota RAV4. If you secure a 60-month (5-year) financing loan with an interest rate of 4.99%, your monthly payments will be reduced by 20% (before taxes, fees, and interest) to $440 per month. A 20% down payment on a 2025 RAV4 ($29,2590 before taxes and fees) is $5,850. This leaves 80% of the SUV’s MSRP ($23,400 plus taxes, fees, and interest) as principal.
The monthly payment amount is the loan principal divided by the loan term (60 months in the example above), plus the variable monthly interest cost on the principal (4.99% per year in the example above). Because interest accrues over time, drivers can save thousands of dollars in interest payments by making a down payment of at least 20% of the car’s total price.
How to reduce interest burden on car loan
If you want to save even more money on your car loan and can manage your monthly payments after making a 20% down payment, there is a way to pay off the entire cost of your car loan before the end of the loan term. That being said, there can be costs associated with paying off your car loan early, which can negatively impact your credit score.
By paying the monthly loan amount and making additional principal payments, you can pay off the vehicle before the end of the loan term. While this will definitely reduce the total amount of interest you pay through your loan, it may have unintended consequences depending on your lender.
After all, the best way to ensure you save on interest when financing a car is to make as much of a down payment as possible and increase your equity in the car. While the “20% Rule” is a strategy to reduce the total cost of financing a vehicle, you can tailor your financing agreement to fit your individual financial needs and goals.
What is the average monthly car payment?
According to consumer credit reporting company Experian, the average car loan payment in the first quarter of 2025 was $675. According to NerdWallet, the average annual interest rate on a new car is 6.70% for people with credit scores between 661 and 780. Interest rates increase significantly for drivers with lower credit scores (13.22% for scores between 501 and 600).
Rising new car prices and high interest rates are making it more expensive than ever to buy a new car. Before purchasing a new car, truck, or SUV, drivers should:
- Evaluate the actual cost of your new car, including taxes, fees, and interest.
- Calculate your exact monthly car loan payment and see if it fits within your budget.
- Consider how a higher down payment percentage reduces your total financing expenses.
A new car may be fun to own and drive, but you’ll rarely need it. Used cars offer good value at a more affordable price. Thanks to depreciation, American drivers can find great deals on used car models that cost thousands of yen less than new cars. So if you’re planning on buying a new car in 2025, be sure to double-check the numbers before making any financial commitments.
