The automotive industry has been abuzz with talk of the auto loan interest deduction included in the One Big Beautiful Bill — the sweeping federal tax and spending plan that was signed into law on July 4 by President Trump.
How can dealers and consumers take advantage? Here's what you need to know.
What Is the Goal of the Provision?
The aim is to increase affordability and stimulate the automotive market by making auto loan interest tax deductible. With some limitations, consumers who finance their vehicle purchases can get a tax deduction equivalent to the interest on their loan, up to $10,000 per calendar year.
How Does This Benefit Consumers?
For most Americans, buying a car is one of the largest purchases they’ll make, and the majority finance their vehicles through loans. Previously, the interest paid on these loans was not tax-deductible for personal vehicles. The new bill changes that by making car loan interest deductible, effectively lowering the overall cost of financing a vehicle.
Here’s how it works:
- Deduction Scope: Any interest paid on a new vehicle loan qualifies. Leases are not included.
- Vehicle Cap: The deduction applies to vehicles priced at up to $80,000.
- Loan Term Limit: Only loans of up to 72 months (6 years) are eligible.
- Income Phase-Outs: Higher-income earners (above $100,000 per individual or $200,000 per joint filer) will see reduced deduction limits.
- Restrictions: The vehicle being purchased must be assembled in the U.S. and cannot have a gross vehicle weight over 14,000 pounds.
- Timeframe: Interest payments on cars purchased on or after Jan. 1, 2025 are deductible. The deduction ends on Dec. 31, 2029, unless it is extended.
For example, on a $40,000 loan with 7% interest over five years, a consumer might pay about $7,500 in interest. With passage of the One Big Beautiful Bill, a car buyer purchasing a qualifying vehicle can deduct a portion of that $7,500 each year, reducing their taxable income, depending on their tax bracket.
What Does This Mean for Dealers?
For car dealers, the car loan interest tax deduction is expected to drive more traffic to showrooms and increase sales. With the cost of financing reduced, more consumers may be encouraged to purchase new vehicles. Dealers can leverage the deduction as a powerful marketing tool, highlighting the savings to potential buyers.
Additionally, the bill could help dealers close deals and up-sell options, as buyers may be more willing to finance larger purchases or opt for higher trim levels, knowing that they'll be able to use the interest on their loan as a tax deduction.
Potential Impact on the Market
Industry analysts predict that the deduction could lead to a surge in auto sales, benefiting not only dealers but also manufacturers, lenders, and related businesses. The increased affordability of car loans may help offset the challenges posed by high interest rates and changing consumer preferences.
What Should Dealers Do Now?
Now that the legislation has been signed, dealers should educate their customers about the potential benefits. Consider updating marketing materials, training sales staff, and working with finance managers to ensure everyone is ready to explain the new tax deduction. Take time to establish which of the vehicles you market meet the "assembled in the U.S." criteria to qualify for the deduction.
Key Takeaways
The auto loan interest tax deduction included in the One Big Beautiful Bill represents a major opportunity for both car dealers and consumers. Dealers that are proactive in communicating these benefits will be able to capitalize on increased demand. For American consumers, it's a way to reduce the cost of buying a new vehicle by turning the cost of interest payments into a tax break.
[View source.]
