If you have both an auto loan and credit card debt and some extra money each month, the question of where to send it is almost always answerable with one piece of information: which rate is higher?
In most cases, that's the credit card — by a lot. The average credit card APR for accounts carrying balances was 20.97% in Q4 2025 (Federal Reserve G.19). The average new car loan for a prime borrower runs around 6–7%. That's a 14-point spread. Paying the card first isn't close.
But a few real situations complicate it.
The basic math: $15k auto loan at 7% vs. $8k credit card at 22%
Assumptions: 48 months remaining on the auto loan, $400/month in extra cash available, standard minimum payment formula for the credit card.
Scenario A — Pay the credit card first (avalanche): Direct the $400 extra plus credit card minimums at the card while paying auto minimums. Once the card is gone, roll everything to the car.
Scenario B — Pay the auto loan first: Direct the $400 extra at the auto loan while paying card minimums. Once the car is paid off, roll everything to the card.
Results:
| Pay card first | Pay auto first | |
|---|---|---|
| Both debts cleared | ~28–32 months | ~36+ months |
| Total interest paid | ~$2,900–$3,100 | ~$4,500–$4,800 |
| Interest savings | ~$1,600–$1,900 ahead | — |
Why the difference is so large: the credit card charges 22% on $8,000. Every dollar of the $400 monthly extra that goes to the card saves 22% interest per year on that dollar. Every dollar that goes to the car saves 7%. The 15-point spread on that $400/month compounds into nearly $2,000 in savings over the payoff period.
Monthly interest breakdown in the first month:
- Credit card ($8,000 × 22% ÷ 12) = $147/month in interest
- Auto loan ($15,000 × 7% ÷ 12) = $88/month in interest
Every extra dollar to the card stops 22% interest. Every extra dollar to the car stops 7% interest. The math doesn't require a calculator to resolve.
Current auto loan rates — what "7%" actually looks like
Not everyone's auto loan is at 7%. The rate matters for deciding how urgent it is to pay off.
Average auto loan APRs (Experian, Q4 2025):
| Credit tier | New car | Used car |
|---|---|---|
| Excellent (781+) | 5.18% | 6.82% |
| Good (661–780) | 6.70% | 9.06% |
| Near prime (601–660) | 9.83% | 13.74% |
| Subprime (501–600) | 13.22% | 18.99% |
| Deep subprime (under 500) | 15.81% | 21.58% |
If you bought a used car with fair credit, your auto loan might be at 13–14%. Credit cards still typically beat that (average card rate is ~21%), but the gap narrows. If your auto loan is at 18–19% and your card is at 22%, the difference is small enough that other factors (which debt has smaller balance, behavioral preference) can reasonably tip the decision.
The 0% dealer financing exception
If you financed through a dealer promotion at 0% APR, the answer inverts completely: never pay this off early if you have any positive-APR debt.
A 0% loan costs you nothing to carry. Every dollar you send to the car loan instead of a 22% credit card is a dollar that stopped earning 22% guaranteed return and earned 0% instead. Pay the exact minimum on the 0% loan and send everything else to the cards.
The only exception: if your 0% deal includes a retroactive interest clause — "0% if paid in full by [date], otherwise all interest accrues from purchase date" — that changes the math. Read your dealer financing agreement for this language before assuming it's a true 0% loan.
Scenario: 18 months from paying off the car
You have $6,000 left on the car at 7%, about 18 months remaining at the standard minimum (~$352/month). You also have $4,000 in credit card debt at 22%, and $400/month extra.
Option A — Knock out the car in ~2 months (lump sum), then attack the card with everything: Pay extra aggressively to the car for ~2 months, then redirect ~$750/month to the card.
Total interest paid across both debts: ~$1,145
Option B — Pay minimums on car, attack card immediately: Pay the $352 auto minimum and put $400 extra to the card right away.
Total interest paid across both debts: ~$724
Option B saves ~$421. Even though you're only 18 months from finishing the car, those 18 months of the card compounding at 22% cost significantly more than 18 months of the car at 7%.
The "two more months and the car is gone" logic is psychologically appealing. The card doesn't care about your psychological timeline. It's charging $73/month in interest while you wait.
Does paying off the auto loan hurt your credit score?
Yes, slightly, temporarily. Paying off an installment loan closes an active account, which reduces your credit mix (FICO considers having both revolving and installment debt positively). Closed accounts with positive payment history continue contributing to your score for up to 10 years, but open accounts weigh more. The typical result is a drop of 10–20 points, recovering over several months.
When this doesn't matter:
- You're not planning to borrow in the next 12–24 months
- Your score is solidly above 720 and a 15-point dip won't hurt you
When it might matter:
- You're planning a mortgage application in the next 6 months (lenders look at your score at application time)
- Your score is borderline for an important rate tier (e.g., hovering around 680 where a 15-point drop could push you from "prime" to "near prime" on a large loan)
In those cases, calculate the actual cost: a 0.25% higher rate on a $300,000 mortgage costs roughly $16,000 in total interest. If paying off the car early saves you $300 in interest but costs you a rate tier on a mortgage, the credit score consideration wins.
For most people, most of the time, it doesn't change the decision.
Prepayment penalties: check your contract
Prepayment penalties on auto loans are relatively uncommon from major banks and credit unions, but they do exist — particularly from subprime lenders, regional finance companies, and buy-here-pay-here dealers.
Federal law prohibits prepayment penalties on auto loans with terms over 61 months. For shorter loans, state law governs. Where penalties exist, they typically run around 2% of the remaining balance.
Before making a large extra payment, look in your loan agreement for:
- "Prepayment penalty"
- "Precomputed interest" or "Rule of 78s"
- Language about how extra payments are applied (some lenders apply extra payments to future scheduled payments rather than reducing principal — call and specify "apply to principal" if so)
If your loan uses the Rule of 78s — an older interest-front-loading structure where you pay a disproportionate share of interest early — early payoff savings are smaller than simple interest math suggests.
The behavioral case for paying the car first
The math says pay the card. But humans aren't spreadsheets.
Paying off the car first can be the right call if:
- You've started debt payoff plans before and quit when they felt abstract
- The fixed monthly car payment causes ongoing stress that bleeds into other decisions
- Eliminating one bill entirely would meaningfully reduce financial anxiety
The car payment is a fixed, predictable obligation. Eliminating it creates real cash flow relief — $352/month freed up, completely, forever. For some people, that concrete win matters more than the $400–$500 in interest they'd save by attacking the card instead.
This is the same logic as the debt snowball vs. debt avalanche tradeoff. If the behavioral outcome (you stick with the plan) matters more than the mathematical outcome (you pay slightly less interest), pay the smaller-balance debt first even if the rate is lower.
The rate gap matters here though. A 7% car loan vs. a 22% credit card is a large spread — the interest cost of "doing it in the less optimal order" is around $1,600–$2,000. That's a meaningful penalty to pay for behavioral preference. If your auto loan is at 13% and your card is at 16%, the gap is small and the behavioral argument carries more weight.
What to do with the freed-up payment after payoff
When either debt clears, you'll have that payment plus your $400/month extra available. The order of operations:
- Finish any remaining debt at the same total payment — don't let the freed cash disappear into expenses
- Build an emergency fund to 3 months of expenses if you don't have one — prevents new debt when the next unexpected expense hits
- Invest — 401(k) to the employer match first (free money), then Roth IRA, then taxable accounts
The car payment and extra cash you've been managing are already gone from your mental budget. Keep them gone by redirecting to the next priority rather than absorbing them into spending.