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When you refinance your auto loan, you take out a new loan — preferably one with a lower interest rate or better terms — and use it to pay off your old loan. You then make payments on the new loan. Ideally, in swapping one loan for another, you are able to save money or make your monthly payment more manageable.

Here’s a look at how refinancing an auto loan works, the benefits of refinancing, and the steps you should take if you’re considering one.

What Does Car Refinancing Do?

The refinancing process can help you lock in a lower interest rate or it can help you change your monthly payment by shortening or lengthening your loan term. If your goal is to lower your monthly payment, you’ll need to lengthen your loan term. Be aware that a longer term means you’ll end up making interest payments for longer, which can ultimately increase the cost of your loan.

When you shorten your term, you increase your monthly payment, but you decrease the length of time over which you’ll pay interest. This can help make your loan less expensive overall.

Why Should I Refinance My Auto Loan?

Two of the main reasons for refinancing your car are to help you lower your interest rate or change the size of your monthly payment.

Interest rates are based in part on a lender’s prime rate. The prime rate is based on the federal funds rate, which is the amount of interest banks charge each other to borrow overnight. When the Federal Reserve lowers interest rates, loan rates may drop, as well, signaling a potential opportunity to refinance your car.

The car loan interest rate a lender offers will also be based largely on your credit score. The better your score, the lower your interest rate will likely be. If you’ve built your credit score recently, you may consider refinancing.

Finally, if you want to pay off your loan faster or you’re looking to make your monthly payment more manageable, consider refinancing to change the length of your loan term.

Recommended: When Should or Shouldn’t You Refinance a Car Loan?

How to Refinance a Car

If you’re interested in switching out your old loan with a new one, here are the basic steps you’ll need to follow on how to refinance your auto loan.

1. Determine Whether Refinancing Makes Sense for You

If you qualify for a lower interest rate or you’re looking to change your loan terms, a refinance might be right for you. However, there are certain situations in which it may not make sense. For example, find out if your old loan has prepayment penalties. If it does, these penalties could negate whatever money you might save on a refinance.

If you owe more money than your vehicle is currently worth — a situation known as being underwater on your loan — you may have trouble finding a lender willing to extend a new loan. In this case, you may consider continuing to pay off your old loan until you are no longer underwater.

Recommended: How to Lower Car Payments

2. Review Your Credit Score

A higher credit score can help you qualify for a loan with a lower interest rate. If your credit score has fallen since you applied for your first loan, you may want to take steps to build it, including making on-time debt payments and paying down debt to improve your credit utilization ratio.

Your credit score is based on your credit report. Check your credit report to make sure the information recorded is accurate. Report any mistakes to the credit reporting bureaus — TransUnion®, Experian®, and Equifax®.

3. Gather the Appropriate Documents

As you prepare to apply for a new loan, prepare your supporting documentation. Lenders will usually ask for your driver’s license, Social Security number, proof of insurance, and proof of income.

Your lender will also ask you for a copy of your loan contract and ask about details of your existing loan. They will want to know your remaining loan balance, your interest rate, your loan term, and your current monthly payment.

Recommended: What Questions Should You Ask When Refinancing a Car Loan?

4. Apply for Financing

Once you have all of your documentation prepared, it’s time to apply for financing. Applying for a loan will trigger what is known as a “hard inquiry” or “hard pull” on your credit report. This will cause your credit score to dip temporarily.

If you’re unsure about whether or not you want to refinance, you can get prequalified. Getting prequalified can give you an idea about whether you’ll qualify and what interest rates you’ll qualify for if you do decide to apply. Prequalifying also does not trigger a hard pull on your credit.

Will Shopping Around for Rates Hurt Your Credit Score?

The credit scoring companies don’t want to penalize consumers for shopping around for the best auto loans. As a result, if you apply for multiple loans within a 14- to 45-day period (the length of time depends on the scoring company), each hard pull on your credit score will only count as one.

How Long Does an Auto Refinance Take?

The auto loan refinancing process typically takes anywhere from two to four weeks. The process may take longer, depending on how long it takes your previous lender to apply money from your new loan to pay off your old one.

Recommended: How Soon Can You Refinance a Car Loan After Purchase?

What Should You Do If You Can’t Refinance Your Auto Loan?

If you are unable to qualify for an auto loan refinance, you may want to consider the following options:

Renegotiate Your Loan Terms

If you’re having trouble making your current monthly payment, your lender may allow you to pause payments for a short period of time. They might also be willing to renegotiate your loan terms if you explain your financial situation to them.

Sell Your Car

If you can no longer make your monthly auto payment, you could consider selling your car. You can use the proceeds from the sale to pay off your loan. If you owe more than you’re able to get for your car, you’ll need to find another source of cash to make up the difference.

Recommended: Exotic Car Financing

Voluntary Repossession

If you’ve missed auto loan payments and you’re in default on your loan, you could initiate the repossession process through voluntary repossession. The voluntary surrender of your car involves returning it to your lender and asking them to repossess and sell your car to partially or fully eliminate your debt.

Recommended: Car Repossession: How It Affects Your Finances

The Takeaway

Refinancing your auto loan can be a great way to make your monthly payment work better for you or to save money on interest, especially if interest rates have dropped or your financial situation has improved.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Can I refinance a used car loan?

Yes, you can refinance a used car loan. Shop around for lenders who offer competitive rates for used cars, check your credit score, and gather all necessary documents. Refinancing can lower your interest rate and monthly payments, potentially saving you money over the loan term.

How much equity do I need to refinance my car?

Technically, you can refinance your car immediately after purchasing, even if the only equity you’ve built in your vehicle may be the down payment.

How do I find the best car refinancing rates?

To find the best car refinancing rates, shop around and compare offers from multiple lenders, check your credit score, and consider building it if necessary. Look for low interest rates, favorable terms, and no hidden fees. Negotiate with lenders and use pre-approval offers to your advantage.

Photo credit: iStock/FG Trade Latin

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q325-048

Car loans typically range from two to seven years, or 24 to 84 months. The average car loan length is between three and five years, but the length you choose will vary depending on your goals and financial situation.

As you’re shopping for a car loan, you’ll need to consider the term length, your down payment, and the car loan’s interest rate. Think about how much of a monthly payment you can afford and how long you want to be making payments for. The shorter the term, the higher your payments will be, but the less you’ll pay in interest overall.

Here’s a closer look at average terms for new and used auto loans and how to determine what term might be right for you.

How Long Is a Typical Car Loan?

The average car loan length for new vehicles in the first quarter of 2025 stood at 68.63 months, or nearly six years. That’s down slightly year over year. For used vehicles, the average term for an auto loan is slightly lower at 67.22 months. Used auto loan terms appear to be on the rise year over year.

The move toward longer-term loans may reflect a consumer desire for more manageable monthly payments. Typically, the longer a loan’s term, the lower the amount the borrower pays each month. However, they may end up paying quite a bit more in interest over the life of the loan, compared with what they would have paid with more traditional four- or five-year terms.

New Cars

On average, new auto loan terms have been decreasing slightly for all but the riskiest loans over the past year, according to the credit bureau Experian®. Terms have decreased the most for super prime loans to borrowers with the best credit.

Used Cars

In contrast to the average new car loan, used car loan terms have risen over the past year across all risk types. Super prime loans saw the greatest increase, while subprime loans saw the smallest.

Maximum and Minimum Loan Term Length

You may ask, “How long are car loans?” The answer can vary across financial institutions. Lenders determine the maximum and minimum loan terms they are willing to offer consumers. Some lenders may offer loan terms as short as 12 months and as long as 84 months, with some even offering loans up to 144 months.

The way car loans work is that lenders provide financing to help borrowers purchase a new or used vehicle. Borrowers are expected to repay the car loan over a set term, and these loans may include annual percentage rates or APR interest charges.

Recommended: Smarter Ways to Get a Car Loan

Determining the Right Car Loan Length for You

The length of your term can have a big impact on how much you end up paying each month and over the life of your auto loan. Generally speaking, the longer the loan term, the smaller your monthly payment will be. This can make them more manageable for people who don’t have extra cash flow.

However, there’s a catch: Longer loan terms may lead to higher car loan interest rates, and at the very least, it means you’ll be making interest payments for a longer period of time. So, for lenders, the advantage of longer terms is that they’ll be able to collect more interest from you. That puts you at a disadvantage and you may end up owing thousands of dollars more on top of the price of your vehicle.

Once you factor in the increased cost of interest over the life of your loan, you may decide that a longer term is too expensive for you. If this is the case, consider saving longer to increase the size of your down payment. Typically, the more money you put down, the lower your monthly payment and interest rate will be, which can help make your payments smaller.

You might also try to build your credit score by correcting any errors on your credit report and paying off debts. The higher your credit score, the more likely lenders are to offer you loans with favorable interest rates, which can also save you money.

Here are the pros and cons of longer auto loan terms at a glance.

Short- vs Long-Term Car Loans

When financing a vehicle, understanding the difference between short-term and long-term auto loans is crucial. These loan types vary significantly in terms of monthly payments, interest rates, and the total cost of the loan over time.

Pros and Cons of Short-Term Auto Loans

Below we highlight some of the pros and cons of short-term auto loans:

Pros

•   Loan amortization schedule can feature 48 monthly payments or fewer

•   May feature fewer interest charges than long-term auto financing

•   Can help consumers build credit

Cons

•   May feature sizable monthly payments

•   May require good credit when financing new car purchase

•   Can impact your debt-to-income ratio more than long-term financing

Pros and Cons of Long-Term Auto Loans

Below we highlight some of the pros and cons of long-term auto loans:

Pros

•   Can make it easier for consumers to afford new and used cars

•   May feature affordable monthly repayments

•   Can help consumers build credit

Cons

•   Consumers may face interest charges for 85 months or longer

•   Can keep consumers indebted for more than seven years

•   Interest rates may be higher than short-term financing

Typical Term Lengths for Car Leases

A typical new car lease has an average term of 35.9 months as of the first quarter of 2025, according to Experian. When considering the option of leasing vs. buying a car, you may review the pros and cons of car lease financing.

A car lease typically includes a lower monthly payment than auto loan financing. The average monthly payment on a new car lease in 2025 stood at $595, while the average new car loan repayment stood at $745.

Recommended: Settle a Charge Off Auto Loan

Choosing the Right Auto Loan Term Length for You

Exploring what you can afford and what you’re willing to pay may help you choose the right auto loan term length for you.

A short-term loan of 48 months or less may feature a sizable monthly payment but fewer interest charges. A long-term loan of 84 months or more may provide you with a more affordable monthly payment but greater exposure to interest charges.

Failing to pay and defaulting on an auto loan can hurt your credit score. You may also lose the vehicle to car repossession if you default on a secured auto loan that pledges the vehicle as collateral.

Recommended: Why Are Loans Secured With Collateral?

How Refinancing Can Change the Length of a Car Loan

If at any point your auto loan becomes unmanageable, you want to pay off your loan early, or you want to save money with a lower interest rate, refinancing your auto loan is a possibility. When you refinance your loan, you essentially take out a new loan to pay off your old one. Your new loan might allow you to secure better terms or a better interest rate.

For example, you could lengthen the term of your loan when you refinance to lower your monthly payments. Also, ideally, you would be able to find a new loan with a lower interest rate, which could save you money in the long run.

Consider refinancing if your income, credit score, or debt-to-income ratio improves. These are metrics lenders use when deciding whether to extend a loan. If interest rates drop in general, or if you find a better deal than the one you initially signed up for, refinancing may also be worth considering. Refinancing could also help you pay off your car loan faster if you decide to shorten your term.

Refinancing with bad credit can be more difficult, but it’s often still possible to find lenders willing to offer you a better loan.

Recommended: Pros and Cons of Car Refinancing

The Takeaway

In recent years, new auto loan terms have been higher than they’ve historically been. However, before you sign on for a loan with a long term, be aware of some serious financial considerations.

While a longer term can make your auto payments more manageable in the short term, you’ll end up paying more in interest over the life of the loan. If your term is long enough, your loan could end up upside down, meaning you owe your lender more than your car is actually worth.

So before you buy, carefully consider how a longer term might fit into your overall financial plan and whether there are other ways for you to make your auto loan more manageable, including refinancing the loan down the line.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is 60 months considered a long car loan term?

No, 60 months is considered average for a car loan term. Getting a car loan term greater than seven years would be considered long.

How long is the average vehicle loan length?

The average term on car loans stood at 68.63 months for new vehicles and 67.22 months for used vehicles bought in the first quarter of 2025, according to Experian. That places the average between five and six years.

Is seven years the longest possible car loan length?

No, seven years is not the longest possible car loan length. Lenders that provide financing for exotic cars may offer loan terms up to 144 months or even 180 months, in some cases.

Photo credit: iStock/DMP

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q325-047

Getting financing to purchase a new or used vehicle can sometimes be a better option than paying cash for it. But when you’re reviewing auto loans, it’s important to understand how car loan amortization works.

Auto loan amortization simply means the process of paying off a vehicle loan. When a buyer uses financing to purchase a vehicle, the lender or financing company should provide that buyer with an auto loan amortization schedule. The schedule explains how the loan payments are applied over time.

Keep reading to learn how car loan amortization works, what factors affect car loan amortization, how to calculate amortization, and more.

How Car Loan Amortization Works

Amortization refers to the process of paying off a loan (a car loan or any other kind of loan) according to a predetermined schedule. When a loan follows an amortization schedule, the payments are divided between the principal owed and the finance charges. Specifically, part of each payment is applied to:

•   Principal: This represents the amount of money you borrowed to purchase the vehicle.

•   Interest: This is the cost the lender charges you for financing the vehicle with a loan.

•   Fees: This includes any fees that are factored into your loan’s annual percentage rate (APR).

Auto Loan Amortization Calculation

The most important thing to understand about car loan amortization is how payments are applied. During the early part of the loan, a larger portion of each payment you make is directed to the interest and fees that you owe. Over time, this balance shifts so that by the time you reach the end of your loan term, more of your monthly payment goes to the principal.

This allows the lender or financing company to collect interest and fees sooner rather than later. If you end up defaulting on the loan midway or three-quarters of the way through the loan term, for instance, the lender has already collected a sizable amount of car loan interest and fees for the money it loaned you. Auto loan amortization effectively allows lenders to protect their investments.

Recommended: What Is a Lease Disposition?

How a Car Loan Amortization Schedule Works

When you finance a vehicle, the lender doesn’t leave you in the dark about how your payments are applied. Instead, it provides you with an auto loan amortization schedule.

This amortization schedule breaks down for you:

•   The total number of payments you’ll make on the loan

•   The beginning loan balance for the month

•   The ending loan balance for the month after your payment is applied

•   How much of the payment goes toward interest

•   How much of the payment goes toward fees, if applicable

•   How much of the payment goes toward the loan principal

Recommended: What Is a VIN Number?

Example Car Loan Amortization Schedule

If you’re still shopping for an auto loan, you can use an amortization schedule car loan calculator to estimate what your payments will look like over time. For example, say you want to take out a $20,000 loan with a 60-month term. You plan to put down $2,500 on the loan and you’ll pay $940 in taxes and fees at signing, leaving you with a total financing amount of $18,440. Assuming a 4% interest rate, your monthly payments would work out to be $339.60.

If you plug the numbers into an amortization schedule auto loan calculator, you’ll see that when you make your first payment, $278.13 would go to the principal while $61.47 would go to interest. By the time you reach your 60th and final payment, $338.53 would go to the principal while just $1.13 would go to interest.

Recommended: What Is Vehicle Registration?

What Factors Affect Auto Loan Amortization?

There are a number of factors that can influence car amortization when you’re using financing to purchase a vehicle. The most important are:

•   Down payment: The more you put down on an auto loan, the less you’ll have to finance and the lower your monthly payments may be.

•   Trade-in value: Offering a vehicle for trade-in could also reduce the amount you have to finance and thus lower your payments.

•   Fees and taxes: If you have to pay taxes, title fees, and other costs at signing that are rolled into the loan, that can affect the amount that’s amortized.

•   Interest rate: Your auto loan’s interest rate also matters, since a higher rate means more interest paid in total over the life of the loan.

•   Loan term: The longer your loan term, the more payments there are on your amortization schedule and the more interest you’ll pay altogether, even though what you pay per month may be less than you’d pay with a shorter term.

If you’re shopping for a vehicle, using a car loan amortization calculator to play around with the numbers can be helpful as you set your budget. You can see at a glance how choosing a shorter or longer loan term, financing a smaller or larger amount, or getting a higher versus lower interest rate can affect your financing costs.

Recommended: Average Car Loan Interest Rate by Credit Score

4 Things to Do to Improve Your Amortization Schedule

There are some things you can do to directly impact what your car loan amortization schedule looks like and how quickly you’re able to pay the vehicle off. They include:

1. Getting More Favorable Rates

Building your credit score may help you qualify for more favorable auto loan rates.

2. Larger Down Payment

Offering a larger down payment should reduce the amount you need to finance.

3. Less Expensive Vehicle

Adjusting your budget to allow you to purchase a less expensive vehicle will make a difference.

4. Making Extra Payments

Making extra payments toward the loan’s principal, beyond those dictated by the amortization schedule, will help.

Recommended: What Is a Car Loan Appraisal?

Refinancing Can Affect Car Loan Amortization

If you have a vehicle loan currently, it’s possible that you might want to refinance it into a new loan at different terms. Doing so could save you money if you’re able to secure a lower interest rate, but auto loan refinancing can also affect your car loan amortization schedule.

For example, if you end up extending the loan term, that can add months or even years onto your amortization schedule. And again, the longer the loan term, the more interest you could end up paying altogether, even if the new rate is significantly lower than your original auto loan rate.

Before refinancing, it’s a good idea to use an auto refinance calculator to determine how much you could save in interest to help you decide if it’s worth it. Keep in mind that you may have trouble refinancing an auto loan if you’re currently upside down, meaning that you owe more than the vehicle is worth. Lenders may require you to have a certain loan-to-value ratio to be approved for a refinance loan.

The Takeaway

When it comes to financing a vehicle, it’s important to ensure that you’re getting the most value for your money. Your auto loan amortization schedule is a major tool in understanding where your money is going.

Knowing how car loan amortization works can help you choose the right auto loan financing option for your needs in the future, and it can also give you some useful guidelines if you want to consider refinancing your current auto loan.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

How is amortization calculated for car loans?

Amortization for car loans is calculated by spreading the loan amount plus interest over the loan term in fixed monthly payments. Each payment covers interest and reduces principal. Early payments mainly pay interest, with principal reduction increasing over time. Amortization schedules show how payments impact the balance monthly.

Are 72-month car loans a good idea typically?

A 72-month car loan offers lower monthly payments, but it typically costs more in interest over time and may lead to negative equity as the car depreciates. Shorter terms are usually better financially, as they build equity faster. A 72-month loan is best suited for budget flexibility, not long-term savings.

Is every auto loan amortized?

Yes, most auto loans are amortized, meaning payments are structured to cover both interest and principal over the loan term in fixed installments. With each payment, the interest portion decreases while the principal portion increases, gradually paying down the loan balance until fully repaid at the end of the term.

Photo credit: iStock/gpointstudio

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

SOALR-Q325-046

Whether or not you can pay car payments by credit card depends on the lender. While some car dealers will accept car payments by credit card, many only accept car loan payments via bank transfer, check, debit card, and other non-credit forms of payment.

But even if it’s possible, is it a good idea to pay car payments with a credit card? Before charging your car payments, it’s best to consider all of the ins and outs — particularly the costs you might face.

Paying Car Payments with a Credit Card

Even if a lender does not allow individuals to pay off a car loan directly using their credit card, there are several ways around this limitation that still enables buyers to charge their car payments.

Third-Party Credit Card Processors

While a lender may not accept credit cards directly, they may accept card payments that are facilitated by a third-party processor. In such cases, a lender may work with one specific processing company or they may accept funds from any processor that facilitates credit card payments.

It’s important to note, however, that while such processors may make it possible to charge car payments to an individual’s credit card, such payments are typically subject to extra fees, often based on a percentage of the payment.

Recommended: Cosigner Loan Requirements

Balance Transfer Credit Card

Balance transfer credit cards allow the account holder to transfer the balance owed on another loan onto that credit card. However, there may be some restrictions on the type of debt that can be moved.

For example, some balance transfer credit cards only allow an individual to transfer over existing credit card debt, meaning that if the car payment wasn’t initially made by credit card, that balance would be ineligible. Other balance transfer credit cards may allow individuals to transfer other types of debt, including car payments.

One restriction that many balance transfer credit cards typically have in common is that they don’t allow an individual to transfer a loan that was originally obtained from that same lender. So if a car loan was obtained from a specific bank, the buyer would likely not be able to pay for that loan using a balance transfer credit card issued by the same bank or its affiliates.

Recommended: Selling a Car With a Lien

Cash Advance

Credit cards also typically offer cash advances, which allow an individual to withdraw money against their credit card from an ATM or bank branch. A cash advance is not the same as withdrawing money from a checking or debit account, or even other types of credit card purchases.

While a cash advance provides the card holder with access to immediate cash flow, which they can then use to pay for essentially anything they want, cash advances carry different lending terms than other credit card purchases. They are subject to interest (often at a higher rate than the APR on purchases), and there’s typically no interest-free grace period, even if the advance is paid back by the statement due date. You may face other fees, as well.

Additionally, the cash advance limit on a credit card may be lower than the credit card limit itself.

Money Transfer

It may also be possible to pay for a car with a credit card if the lender accepts money transfers. However, it’s a good idea to check with the credit card issuer before initiating a money transfer, as this type of transaction may be treated like a cash advance and ultimately cost more due to the resulting interest charges and fees.

Recommended: Down Payment Size and Auto Loans

Pros and Cons of Making Car Payments with Credit Cards

Just because it may be possible to make car payments with a credit card, it doesn’t always mean it’s the best choice. Here are some pros and cons of charging car payments.

Pros of Making Car Payments with Credit Cards

•   You can carry a balance with a credit card. While car payments are due in full on the due date each month, credit cards allow an individual to pay only the minimum by their statement date and then carry a balance. Although it’s never a good idea to charge more than one can afford (and outstanding balances are subject to interest charges), this can be an option in the event that unforeseen expenses make cash flow tight in a given month.

•   Flexibility with payments. It also provides more flexibility timing-wise, allowing an individual to make a payment when it suits them (for example, on pay day), instead of their monthly auto loan due date.

•   May get credit card rewards. Charging big-ticket items to a rewards or cash-back credit card may increase benefits and earnings (if car payments are eligible under the rewards program).

•   May receive 0% introductory APR on balance transfer. Some balance transfer cards offer promotional periods with 0% APR charged on loans that are moved over from elsewhere. In such cases, it may be possible to save on interest.

•   Reduces risk of car repossession. Auto loans are typically secured, using the auto itself as collateral. This means that if the buyer fails to make payments, their car can be seized. But credit card debt is unsecured revolving debt, reducing the risk of car repossession.

Cons Making Car Payments with Credit Cards

•   Substantial fees. Many of the workarounds that enable a car buyer to charge payments to their credit cards incur sizable extra fees. Whether it’s a 3% processing fee charged by a third-party who can facilitate payment, ATM fees, higher interest or cash transfer fees, or even prepayment penalties for paying off the balance in full, these all increase the cost of buying a car. Ultimately, paying by card could cost more than the original car loan or than the cost to refinance a car.

•   Credit score may be affected. Credit scores are determined, in part, by an individual’s credit utilization ratio, or the percentage of available credit that they are using. While some credit utilization is a good thing — it shows lenders an individual can manage their credit effectively — too much signals risk to the lender.

•   May pay more in interest. 0% APR offers on balance transfer cards often only apply for a promotional period — and interest climbs after that. If the car loan is not paid off before the new interest rate kicks in, the buyer may end up ultimately paying more for their car.

How Might Paying Car Payments With Credit Cards Affect Your Credit Score?

As mentioned previously, making car payments with your credit card could ding your credit score by increasing your credit utilization ratio, or how much of your available credit you’re using.

Car buyers in the U.S. spend an average of $745 on new car payments each month. This could end up accounting for a big chunk of your available credit, depending on your limit.

Recommended: Car Loans With a 650 Credit Score

Other Ways to Pay Car Loan Payments: Refinance Your Car

Another way to pay for your car is to refinance your auto loan. Refinancing may allow you to get a lower interest rate or extend your loan term, which may lower your monthly payment. Keep in mind, though, that extending your term will make it so you pay more money in interest overall.

But just like paying by credit card, there are pros and cons of refinancing your car, including the potential for additional costs due to prepayment penalties. Before you sign on the dotted line, you’ll want to make sure you ask any and all refinancing questions to ensure refinancing actually makes sense for your situation.

The Takeaway

A car is one of the most significant purchases an individual can make, and the costs involved mean it’s a good idea to put some thought into how best to pay back a car loan. Make sure to consider the pros and cons involved if you choose to pay your car payment with a credit card. And if you’re struggling to make your monthly car payments, you could consider refinancing your car.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

Is it smart to use a credit card for car payment?

Using a credit card for a car payment can earn rewards or utilize a 0% introductory APR, but it’s generally unwise due to high interest rates, potential cash-advance fees, and the risk of carrying large balances. Plus, some lenders may not allow it. Only consider it if you can pay off the charge immediately and avoid extra costs.

Do car dealers accept credit cards for payment?

Many car dealers accept credit cards for payments, but some may limit the amount or charge a processing fee. It’s important to check with the dealer beforehand. Using a credit card can offer rewards and build credit, but be cautious of high interest rates.

Can I pay my monthly car payment with a credit card?

While some lenders may allow you to pay your monthly car payment with a credit card, some may charge a processing fee. This can help you earn rewards and build credit, but ensure you can pay the credit card balance in full to avoid interest.

Photo credit: iStock/Eva-Katalin

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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You’re shopping for a used car and find one that looks great, has low mileage, yet is selling way below fair market value. Is there a catch? Possibly. You may discover that the car has a salvage title that’s dragging down the price.

A salvage title means that the car has undergone extensive damage and was deemed a total loss at some point. While that doesn’t mean you should completely rule out the vehicle, it does mean you should proceed with caution and do some research before you cut a deal.

If you’re thinking about buying (or selling) a car with a salvage title, here are some tips and guidelines to keep in mind, including how to value a salvage title car and challenges you may face when you own a salvage car.

What Is a Salvage Title?

Your car title is the legal document that proves you’re the owner of the car. Brand new cars start with what is known as a “clean” title. Over time, however, that can change. If the car is in an accident or otherwise sustains damage (perhaps due to a flood, fire, or hurricane) that renders it undriveable, it may receive a salvage title.

A salvage title means the insurance company has deemed the car to be a “total loss,” meaning that it will cost close to or more money to repair than what the car is worth. The value percentage that triggers a total loss varies by state and insurer, but it’s typically between 70% and 90% of the car’s resale value.

Once a car is declared a loss, the insurer will generally take possession of the vehicle and issue a salvage certificate. At that point, the car is not legal to drive and cannot be registered.

Sometimes, in an effort to recoup some of the money they lost, the insurer will sell the car to an auto repair company, where it may get repaired or rebuilt. If the repaired vehicle passes inspection and is declared safe to drive, it can then receive a “rebuilt” title. You may purchase rebuilt title cars and register them in your name.

You may see both salvage and rebuilt titles referred to as “branded” titles. A branded title indicates there’s something unusual about the title.

Keep in mind that a salvage title is different from a lemon car, which is a car that has a significant defect that the manufacturer can’t fix within a reasonable amount of time.

Recommended: Getting a Loan for Rebuilt Car Titles

How Can You Check if Your Car Has a Salvage Title?

Sellers and dealerships are required by law to disclose a vehicle’s salvage title. However, this law isn’t easy to enforce, particularly if the car crosses state lines before going on the market. As a result, it’s always wise to do some sleuthing about a car’s history before you consider buying it.

Salvage titles usually display the word “salvage” across the title to distinguish them from a regular title. But if you don’t have access to the title, you can learn about the car’s history by visiting the National Motor Vehicle Title Information System website, VehicleHistory.gov, as well as other vehicle information websites, like Carfax.

A quick visual inspection of the car can also provide clues. There are a number of red flags that can suggest a vehicle has a salvage history, including:

•   Signs of a major repair to the inner fender structures

•   Mud, mold, or rust under the carpet in the trunk

•   Vehicle identification number (VIN) plate attached with materials other than rivets

•   Airbag system light is always on

•   National Highway Traffic Safety Administration (NHTSA) labels, which usually appear on the doors, inside hood, tailgate, and hatchback are missing

Recommended: 9 Tips for Buying a Used Car

Can You Get a Salvage Title Removed?

Once a vehicle’s title has been branded as salvage, it will generally never go back to the way it was titled before. In most states, however, a car with a salvage title can be rebranded as a “rebuilt title” (sometimes called “reconditioned” or “assembled”).

To get the title change, you will need to repair the vehicle and submit it to the Department of Motor Vehicles (DMV) for inspection. If it passes, the DMV will rebrand the title as rebuilt.

People, including dealers and car buyers who know about car titles, however, will be aware that a rebuilt title means the car was previously branded salvage. So, technically, the salvage branding can never be fully erased.

Recommended: Getting a Car Loan After Bankruptcy

Determining the Value of a Car With a Salvage Title

While there is no standard formula that can give you the value of a salvaged car, it’s fairly simple to get a ballpark range of its market value.

The first step is to establish the value of the car had it not been damaged. You can do this by looking it up on Kelley Blue Book, Edmunds, or the National Automobile Dealers or Association (NADA).

These websites are easy to use and allow you to look up a car’s value based on its year, make, model, trim, mileage, and condition. In this case, you can simply use “good” condition to get a starting market value for your salvage calculation.

Once you get the car’s market value in good condition, you’ll want to knock it down because of its salvage condition. Generally, if a car has not been repaired after a major accident, it will only be worth 10% to 50% of an equivalent used car’s value. If the car has been repaired and has a rebuilt title, it will likely receive about 70% of its undamaged value.

Recommended: How to Spot Good Car Value Estimates vs Bad Car Price Estimates

Factors That Can Influence the Value of a Car With a Salvage Title

Salvage car values vary widely due to a range of factors. These include:

•   Make and model: Some car manufacturers have better reputations for durability than others, and some models are more popular than others, both of which can drive up price. This can also vary based on location.

•   Mileage: More mileage signals more overall wear and tear. Thus, a high-mileage vehicle is likely to sell for less than an identical car with half as many miles on the odometer.

•   Reason for the salvage title: This can have a significant impact on the car’s value. A car that’s been in a flood, for example, will generally have less value than a car that’s had body damage due to an accident. A car can also get a salvage title if it was stolen and not recovered for many weeks or months, since the insurer considered it a total loss. This type of salvage car will typically have a much higher value than one that was totaled in an accident.

Challenges of Cars With Salvage Titles

Salvage title cars come with some risks and unknowns. Here are some you may want to consider:

Safety of the Vehicle

It can be hard to understand how much damage you’re dealing with when you consider a car with a salvage title. Even if the car has been repaired, it may have issues that were never properly addressed. And, if the rebuilder cut corners, it could have structural or alignment issues that could potentially make it less safe to drive.

Financing the Vehicle

Lenders tend to avoid the extra risk associated with salvage title cars, so it may not be easy to get a car loan to buy one, especially if the vehicle hasn’t been repaired yet. If you do find a lender, you may need excellent credit, and even then, interest rates may be high.

Insuring the Vehicle

Salvage title vehicles can be difficult to insure, even when they’re rebuilt. Insurance companies may not offer insurance for rebuilt cars at all, and if they do, it will likely be limited. In many cases, they may only offer liability coverage, which will cover damage done by you to another property or person, but won’t cover your vehicle or injuries to you or your passengers.

Selling the Vehicle

If you buy a vehicle that has a salvage title, you’ll generally need to repair it and get it inspected before you can resell it. Even then, you may have trouble selling the car, since buyers will often be suspicious of a car that has a rebuilt title.

Recommended: Selling a Car With a Lien

Can You Refinance a Car With a Salvage Title?

If you can find an auto loan for a salvage title car that has been rebuilt and deemed road-worthy, it may be possible to refinance that loan in the future. When you refinance a loan, you essentially take out a new loan, ideally with better rates and/or terms, and use it to pay off your original loan. You then only make payments on your new loan.

Refinancing might make sense if your initial salvage or rebuilt car loan came with a high interest rate, the monthly payments have become unmanageable, and/or you’ve built your credit score (qualifying you for a lower interest rate). However, it may be just as difficult, if not more so, to find a lender willing to offer a refinance loan than it was to find financing for the salvage vehicle in the first place.

Recommended: Can You Refinance a Car Loan With the Same Lender?

The Takeaway

A car with a salvage title can be significantly cheaper than a used car with a clean title. While it may be tempting to buy one, there are some precautionary measures you may want to take before you seal the deal. These include calculating the car’s value, researching its history, and considering the challenges that can come hand-in-hand with a salvage vehicle, such as potential difficulty with financing, insuring, and reselling it in the future.

If you’re seeking auto loan refinancing, SoFi is here to support you. On SoFi’s marketplace, you can shop and compare financing options for your car in minutes.

FAQ

What are salvage titles on cars?

A salvage title is given to a car that has sustained enough damage (due to an accident or natural disaster like a flood) that it is considered a total loss by the insurance company. A car with a salvage title can’t be legally driven on public roads. If the car gets repaired and passes a state inspection, it can get a rebuilt title. With a rebuilt title, you can register and drive the car.

Is the value of a car with a salvage title low?

Generally, yes. Depending on the reason for the salvage title, cars with salvage titles can be worth anywhere from 50% to 90% less than an equivalent used car’s value.

How can you determine your car value with a salvage title?

You’ll first want to look up what the fair market value for the car would be if it was undamaged using a website like Kelley Blue Book or Edmund’s. Depending on the reason for the salvage title, you’ll then need to discount that price by 50% to 90%. If the car has been repaired, you would only discount the price by around 30%.

Photo credit: iStock/fotostorm

SoFi's marketplace is owned and operated by SoFi Lending Corp.
Advertising Disclosures: The preliminary options presented on this site are from lenders and providers that pay SoFi compensation for marketing their products and services. This affects whether a product or service is presented on this site. SoFi does not include all products and services in the market. All rates, terms, and conditions vary by provider. See SoFi Lending Corp. licensing information below.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®

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