Key takeaways 

• Seven-year loans make up 22% of all new loans in the second quarter of 2025 while 6-year loans dominate the market at 36%.
• Buyers choose lower monthly payments with new car costs nearing $50,000 and loan rates averaging about 7.3%.
• A new auto loan deduction for U.S. vehicles can save some buyers, along with loan shopping.

Longer auto loans are rising as interest rates and vehicle prices stay elevated, with six- and seven-year terms now the majority of new financing.

Elevated interest rates and car prices are nudging buyers toward lengthy auto loans that allow for lower monthly payments but result in higher overall costs. Buyers can offset some of the burden by understanding their options and potential tax breaks.¹

Seven-year auto loans represented a record 22.4% of new-vehicle financing in the second quarter of 2025, rising from 17.6% in the same period a year ago, according to Edmunds^.2

Five-year loans, once the standard, make up about 19% of new-car financing. At the same time, 6-year loans have emerged as the dominant choice among borrowers, comprising about 36% of all loans. Four-year loans account for about 6% of the total, and 3-year loans are 4%.³

Some borrowers are even getting 8-year loans — unheard of a few years ago — though they make up less than 1% of all auto financing.⁴

Why auto loans are getting longer 

The shift to longer-term loans reflects new car prices approaching $50,000 and loan rates averaging about 7.3% in recent months.⁵ Americans are also financing larger amounts than ever, with the average car loan amount in 2025 at about $43,000.⁶

Longer-loan terms have been one of the few levers that buyers can use to control costs, at least on a monthly basis. But lower monthly costs can often translate into higher interest costs over the length of the loan. The average interest paid on a 7-year loan is $15,460, about $4,600 more than the average on a five-year loan.⁷

Empower research shows that Americans on average pay $451.89 in monthly car payments, with nearly 30% listing them as one of their top expenses.

Higher car costs — and related expenses like gas and insurance — haven’t stopped credit from continuing to flow to borrowers. Total auto loan balances grew to $1.66 trillion at the end of the second quarter of 2025 while Americans added $188 billion in new auto loans and leases, according to Federal Reserve Bank of New York.⁸

Read more: Driving costs race ahead: Auto insurance, fuel and car prices on the move

How the tax deduction works for U.S.-assembled cars 

Borrowers might find some relief under the new tax and spending law that took effect in July. The measure allows buyers of new vehicles to deduct up to $10,000 in auto loan interest payments each year, provided certain conditions are met.⁹

The benefit covers all types of U.S.-assembled light-duty vehicles — electric, hybrid, or gas-powered — as long as they’re purchased for personal use. Leases and used vehicles are excluded. It doesn’t matter if the brand is domestic or foreign, only where the car is built.¹⁰

To check eligibility, buyers can check a new vehicle’s window sticker, which is required to list the car’s final assembly point.¹¹ The car’s VIN (Vehicle Identification Number), typically found on the dashboard or driver-side door jamb, can also be entered into the National Highway Traffic Safety Administration’s site to confirm the assembly plant.¹²

Of the roughly 16 million new vehicles expected to be sold in the U.S. this year, as many as 1.8 million could qualify buyers for the new deduction.¹³

But the full benefit is limited to taxpayers with an adjusted gross income (AGI) at or below $100,000 — or $200,000 for joint filers. There’s a gradual phaseout above those levels, ending at individuals with an AGI of $150,000 and $250,000 for couples.¹⁴

A buyer financing $43,000 with a six-year loan on current rates could save $500 in the first year of the tax benefit — about the same as the average monthly payment — according to one estimate. It’s important to note that the tax benefit expires in 2028, so only the first few years of interest payments would apply.¹⁵

Read more: What the big, beautiful bill could mean for wallets nationwide

Steps to manage car loan costs 

A tax break can soften the blow of sizeable car payments, but it shouldn’t be the sole reason driving purchase decisions.¹⁶ Tax savings can be paired with other smart strategies to keep overall costs down, including:

• Capped costs: Aim to keep all car-related costs under 15% to 20% of monthly take-home pay.¹⁷
• Get preapproved: Walking into the dealership with a loan offer from a bank, credit union, or online lender can save buyers hundreds or even thousands of dollars, according to the Consumer Financial Protection Bureau. Dealers may try to beat the rate.¹⁸
• Shop the web: Knowing the desired make and model can save buyers time and money. It sometimes pays to work with dealers’ internet sales department or online direct-to-consumer sites before walking onto a lot.¹⁹

Borrowers that can afford to keep loan terms at five years or less are in better position to avoid to balloon interest charges and negative equity.²⁰

Edmunds found that one in four trade-ins in the second quarter were underwater, with drivers owing an average of $6,745 more than their cars were worth.²¹

Making extra payments, exploring potential refinancing options, and keeping cars longer are ways to avoid those situations.

Read more: How to pay off debt