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The “one big, beautiful bill” was signed into law by President Donald Trump last week, with a gain for some car buyers and a loss for others. Consumers could now benefit from tax deductions on auto loans, but electric vehicle buyers will lose the savings provided by EV tax credits.
Auto loan interest now tax-deductible for some borrowers
Car buyers who finance will be able to deduct up to $10,000 a year for car loan interest they pay. The deduction is “above-the-line,” meaning it will apply to people who claim the standard deduction and those who itemize.
To be eligible, car buyers and their cars will need to meet the following criteria[0].
Vehicle qualifications
New purchase. The deduction applies only to new vehicles, not used ones.
U.S. assembly. The vehicle must have final assembly in the United States.
Personal use. The deduction is for personal-use vehicles, excluding commercial vehicles and leases.
Income limitations
Single filers. The deduction begins phasing out at a modified adjusted gross income (MAGI) of $100,000.
Joint filers. Phase-out begins at a MAGI of $200,000.
Phase-out amount. For every $1,000 of income over the single and joint filer threshold, the available deduction declines by $200.
The intent of the auto loan interest deduction is to make cars more affordable for buyers, given that average car prices and interest rates remain high. But the benefit for some car buyers will be limited.
In fact, a person would need to get an auto loan of more than $110,000 to benefit from the maximum deduction, according to Cox Automotive Chief Economist Jonathan Smoke.
For context, the average new vehicle transaction price is about $49,000. Most vehicles priced at $110,000 or above would be luxury sedans or sports cars, and only about 1% of all auto loans are of that size.
“The typical new loan really would only see around $500 benefit, and that’s in year one and then declining over time,” Smoke said at the Cox Automotive 2025 Mid-Year Review on June 25.
Average monthly car payments are around $750, and a record one in five new car buyers committed to $1,000+ payments in the second quarter of 2025, according to Edmunds.com. So, for most borrowers, the annual savings in loan interest would be less than their monthly car payment.
The auto loan interest deduction is also temporary — effective for tax years 2025 through 2028.
Did you know…
Deducting auto loan interest isn’t a new idea. Prior to 1991, auto loan interest could be claimed as an itemized tax deduction, until it was phased out as part of the Tax Reform Act of 1986.
Say goodbye to EV tax credits
In the past several years, EV buyers and lessees have taken advantage of federal tax credits established under the Inflation Reduction Act — up to $7,500 for new EVs and $4,000 for used. The “one big, beautiful bill” eliminates this EV credit for vehicles purchased and leased after September 30, 2025[0].
Car buyers planning to take advantage of EV tax credits should do so sooner than later. In addition to grabbing the credit before it is gone, car shoppers may find more EV incentives at dealerships wanting to move inventory.
Auto industry groups had pushed for more time to promote EV sales before the tax credit ends, but their attempts were unsuccessful.
Will interest savings offset tariff-driven price increases?
The auto loan interest deduction is meant to improve vehicle affordability, but it won’t do much to help car buyers facing price hikes from tariffs. Here’s a breakdown to explain why.
Imported cars have a 25% tariff. If the car you buy is foreign-built, you’re likely to pay more due to tariffs — and you can’t claim the loan interest deduction. A lose-lose.
Imported car parts have a 25% tariff. All cars with final assembly in the U.S. use some amount of foreign-made content, according to the cars.com American-made index. Anderson Economic Group estimates parts tariffs on these cars will increase their price by at least $2,000. So, while you can claim the interest deduction, its benefit is likely to fall short of the higher price you pay for the car. A win (sort of)-lose.
100%-American-made cars have no tariffs. In theory, this should be a win-win, because this category of vehicles would have no tariff-related price increases and would qualify for the interest deduction, but they don’t actually exist (refer to the second bullet point).
While the tax deduction auto loan interest may be a small win for some car buyers, it doesn’t go far enough to offset the expected cost increase of tariffs for most.
Smart steps to reduce the cost of buying a car
Whether you gain a tax deduction or lose a tax credit from passage of the “one big, beautiful bill,” high car prices and interest rates make it more important than ever to prepare before purchasing a vehicle.
Here are strategies to help you reduce your car cost and secure a monthly payment that fits your budget.
1. Research pricing benchmarks. Before stepping into a dealership, look up the fair market value of the vehicle you’re considering. Use online tools like Kelley Blue Book, Edmunds or NADA Guides to get a realistic idea of what you should expect to pay.
2. Understand how auto loans work. If you plan to finance, take time to learn the basics of auto loans — including how car loan length affects your total cost and how your credit profile impacts your interest rate. Being informed can help you avoid unfavorable loan terms.
3. Compare financing offers. Don’t automatically accept the first loan offer you receive. Compare rates and terms from banks, credit unions and online lenders to find the most competitive auto loan. Even a small difference in interest rate can lead to significant savings over time.
4. Use an auto loan calculator. Before applying for a loan, run the numbers using an auto loan calculator. Adjust variables like loan amount, interest rate, term and down payment to find a monthly payment that aligns with your financial goals.
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