Purchasing a vehicle ranks among the most significant financial decisions for numerous Americans throughout their lifetimes. The cost of new cars has reached unprecedented levels, gradually rising to an average of almost $50,000 in 2025, as reported.
Kelley Blue Book
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When acquiring a brand-new vehicle in 2025, selecting an appropriate financing approach will significantly influence both your time as an owner and your monthly expenses. The so-called “20% rule” could be beneficial; learn how this guideline might assist you in securing the perfect car, pickup, or sport utility vehicle for yourself.
What does the 20% rule entail when it comes to car financing?
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In 2025, numerous car buyers will opt for financing their new vehicles. How you set up your financial arrangement impacts not only the amount of equity you build in your new car but also influences your monthly, yearly, and overall payments along with the accrued interest.
A minimum down payment of 20% can make financial deals more cost-effective over time. As stated, this down payment decreases both the initial loan amount and the interest you’ll probably have to pay.
Chase Bank
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Assume you’re purchasing a brand-new 2025 Toyota RAV4. Should you obtain a 60-month (five-year) financing agreement at an annual percentage rate of 4.99%, your monthly installment might come down to approximately $440 per month after putting down 20% (excluding taxes, fees, and interest charges). For instance, placing 20% down on the suggested retail price of the 2025 RAV4 ($29,259 prior to adding taxes and fees), would equate to around $5,850. Consequently, this reduces the initial borrowed sum to about 80% of the vehicle’s MSRP which includes additional costs like taxes, fees, and accrued interest—totaling roughly $23,400 initially.
The monthly installment for your loan consists of dividing the main loan amount by your repayment period (which is 60 months in this case), along with adding the varying monthly interest based on the principal (with an annual rate of 4.99% mentioned here). Motorists could potentially cut their interest expenses significantly—by several thousand dollars—by making a down payment equaling at least 20% of the vehicle’s overall price due to how accumulated interest impacts the long-term costs.
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Ways to decrease financing expenses on auto loans
If you’re looking to further reduce the cost of your car loan and can handle additional monthly payments following a 20% down payment, you have options for settling the entire amount owed under your auto finance agreement prior to completing all scheduled installments. However, this might come with certain penalties, and it may negatively impact your credit rating.
By paying your regular monthly loan installment along with extra payments towards the principal, you could settle your car loan ahead of schedule. This strategy helps minimize the overall interest paid over the life of the loan; however, this might lead to unforeseen outcomes based on how your specific lender operates.
In the end, the most effective method to minimize interest costs when purchasing a car through financing is to put down as large a deposit as you can manage, thereby increasing your vehicle’s equity. While adhering to the “20% rule” can help cut overall financing expenses, it’s also wise to customize your loan terms according to your specific financial situation and objectives.
What is the typical amount for a monthly car payment?
As of the first quarter of 2025, the typical monthly car loan payment stood at $675, as reported by the consumer credit reporting agency.
Experian
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NerdWallet
indicates that the typical yearly interest rate for new car loans stands at 6.70% for individuals whose credit score ranges from 661 to 780. However, borrowers with a credit score between 501 and 600 experience substantially higher interest rates, which average around 13.22%.
With escalating costs of new vehicles and elevated interest rates, purchasing a new car through financing has become challenging.
more expensive than ever
Before buying a new car, truck, or SUV, motorists should:
- Evaluate the actual expense of the new vehicle, factoring in taxes, fees, and interest.
- Determine the exact monthly car loan payment to ensure it aligns with your budget.
- Think about how making a large down payment might decrease your overall cost of borrowing.
brand-new vehicles might be exciting to possess and operate, yet they are often not essential. Used cars can offer ample value at lower costs. Due to depreciation, U.S. motorists can secure excellent deals on them.
used car models
That costs thousands less than buying new. Therefore, if you’re looking for a new car in 2025, make certain to thoroughly verify your figures prior to making any financial commitments.
The article initially appeared on USA TODAY:
Purchasing a new vehicle? Here’s why you should consider following the 20% rule.
