Why Borrowing for a Car Might Actually Be Smart Now

For the last 40 years, the golden rule of car buying was simple: “Pay cash if you can.” Interest on car loans hasn’t been tax-deductible since the Reagan administration, so every dollar of interest was money down the drain.

As of the 2025 tax year, for many Americans, that rule is dead — at least for a few years.

A provision in the One Big Beautiful Bill (OBBB) reinstated the auto loan interest deduction, effective for the tax years 2025 through 2028, but with very specific conditions that you need to know before you walk onto a lot.

The rules of the road

You can now deduct up to $10,000 in interest paid on a vehicle loan, but only if the car meets all of these criteria:

1. The vehicle must be new: Used cars do not qualify.
2. The vehicle must be U.S.-assembled: The final assembly point must be in the United States (similar to the EV tax credit rules).
3. The vehicle must be a car, minivan, van, SUV, pick-up truck or motorcycle with a gross vehicle weight rating of less than 14,000 pounds.
4. The loan must have been issued in 2025-2028: If you took out a car loan in 2024 or earlier, it does not qualify for the deduction, even if the car meets the above criteria.

Note: If your vehicle qualifies, the deduction is the “above-the-line” kind, meaning you do not need to itemize to claim it.

That means that even if you take the standard deduction, you can still write off your car loan interest directly from your income. However, the deduction phases out for taxpayers with modified adjusted gross income over $100,000 ($200,000 for joint filers).

See Also:

9 Ways Companies Are Overcharging You—And Betting You Won’t Notice

The math: Cash vs. finance

Imagine you are buying a $50,000 2025 Ford Explorer (assembled in Chicago).

• Old logic: Pay $50,000 cash to avoid a 7% interest rate.
• 2026 logic: Finance the car at 7%. Keep your $50,000 cash in a high-yield savings account earning 5%.

Because you can deduct the 7% interest you pay on the loan, your effective interest rate after tax savings (assuming you’re in the 24% tax bracket) drops to roughly 5.3%. Meanwhile, your cash is earning 5%. The cost of borrowing has become negligible, allowing you to keep your cash for emergencies.

The move: If you are shopping this weekend, check the car’s VIN on the dashboard. If it starts with a 1, 4, or 5, it was likely assembled in the U.S. and qualifies for the tax break. (Just to be sure, the IRS has a VIN decoder here.)

If it starts with a J (Japan) or W (Germany), you can’t deduct a dime.

If you end up buying a card, whether it qualifies for the auto loan deduction or not, make sure you also shop around for insurance rates. This car insurance comparison site makes it quick and easy to get multiple quotes, so you can simply pick the best one.