The One Big Beautiful Bill Act (OBBBA), which became law in the summer of 2025, introduced a provision allowing a deduction for auto loan interest. After OBBBA passed, I shared my thoughts on this in a recent post.
Auto loan interest deduction You can deduct up to $10,000 in interest for your newly purchased car until 2028. This is time-limited and only applies to vehicles with “final assembly in the United States.” So, buying a new car on credit feels slightly less imprudent.
Let’s dive a bit deeper into these details.
Rules
Here are some important rules to remember:
- Only $10,000 in interest is deductible. This isn’t about the interest on a $10,000 loan; for example, if you buy a $100,000 car with a 10% loan, all interest is deductible. If your total interest across multiple cars is below $10,000, it’s still fully deductible.
- The vehicle must be new. Even if it’s only got a few thousand miles on it, it won’t count unless it’s brand new.
- The car has to be for personal use—no commercial vehicles allowed.
- The loan must be secured by the vehicle itself; a typical car loan, not a credit card payment.
- Generally, it should be a standard vehicle, which includes cars, minivans, SUVs, etc., weighing less than 14,000 pounds. No large trucks or RVs. Just to give you a sense, my own truck weighs about 8,000 pounds.
- You don’t need to itemize deductions to claim this one, which is interesting given the trend away from Schedule A deductions.
- This deduction phases out for individuals with a Modified Adjusted Gross Income (MAGI) of $100,000 and $200,000 for married couples, and it isn’t adjusted for inflation. This could leave out many participants, particularly those who would be eligible for the $10,000 interest deduction.
- It’s a temporary deduction, expiring after 2028.
- The vehicle must have had its “final assembly” completed in the United States. This can be a bit tricky these days, so here’s a comprehensive list. There are 117 vehicles listed, including some brands you may not think of as American-made. However, not all models from these brands have final assembly in the U.S., so check before buying if you’re planning to finance.
- acura
- BMW
- buick
- Cadillac
- chevrolet
- dodge
- ford
- Genesis
- GMC
- honda
- hyundai
- infinity
- jeep
- kia
- lexus
- lincoln
- mazda
- mercedes benz
- nissan
- Polaris
- Rivian
- subaru
- tesla
- toyota
- Vinfast
- volkswagen
- volvo
Do you see what I’m getting at? Almost every brand manufactures something in the U.S., but sometimes it’s just one model.
Click here for details:
Consider paying cash for cars — 15 reasons against financing.
Avoid being “car poor.”
My thoughts on cars
Honestly, I’m not much of a car enthusiast. I’ve driven everything from a $1,850 clunker (which I eventually sold for $1,500 after four years) to a $94,000 truck (a rented supercar now and then). The only loan I had was for a $3,000 Geo Prizm my parents let me buy with a 0% interest rate, and I didn’t even repay it until I graduated. I truly believe you can find reliable, safe transportation for $5,000 to $10,000. Back in the day, it was even cheaper, around $2,000. So it’s perplexing why someone would take out a big auto loan.
I’m pretty convinced that one reason many Americans don’t reach millionaire status is due to the expenses parked in their driveways. If a car adds, let’s say, $5,000 a year (for costs like depreciation, maintenance, insurance, and interest), over 40 years, you’re looking at around $1.3 million. That’s a lot of money.
=FV(8%,40,-5000) = $1,295,282
However, I also realize that $5,000 a year isn’t going to be the sole factor differentiating a primary care physician earning $375,000, who might retire early with financial independence, from someone who cannot. If your only “mistake” is financing a $60,000 car you plan on keeping for a decade, you’ll likely be fine.
Is buying a car with credit a good idea now?
Not really. In other words, make the choice that suits you best. It’s your finances and your life. Personal finance isn’t a dogma, so you don’t need permission to take out an auto loan. But this new law doesn’t really change the game significantly—it just makes car loans seem a bit less foolish.
First off, this deduction only lasts until 2028. So if you buy a car in January 2026, you’re limited to deducting interest for a maximum of 36 months.
Secondly, those in the WCI often won’t actually benefit from this interest deduction due to the income phase-out rules. If you’re buying a luxury vehicle, having a lower income makes that decision less wise.
Thirdly, if you listen to my advice and opt for a car costing under $10,000, the tax savings would likely be minimal if you have to finance it. Let’s look at a $6,000 loan at 5%. You’d be paying around $300 in interest annually. If you’re earning less than $100,000, your tax rate might be around 12%. So, that’s $36 back—a small gain. Keep in mind, this applies to new vehicles, which is kind of tricky if your income’s below $100,000.
Fourth, if you’re getting an expensive new car with a hefty loan, the deduction might not be worth it. For instance, if you manage to score a 5% interest rate on a $35,000 Toyota Camry, that works out to $210 a year in tax savings. Meanwhile, you might be shelling out $674 a month for five years. It makes it tough to get ahead when most of your disposable income is tied up in things you’ve already splurged on.
Click here for details:
A well-aged car can lead to wealth.
The most economical way to own a vehicle.
Conclusion
In summary, my advice hasn’t changed: buying a car on credit still seems unwise.
What are your thoughts? Do you disagree? Are you or someone you know considering taking advantage of this new OBBBA provision?
