Car Loan Calculator with the New Interest Deduction

Quick answer: what a typical car loan costs

The average new-car loan in Q2 2026 was $43,610 over 69.5 months at 6.35%, with an average payment of $765 a month; used-car loans averaged 11.19% (Experian). Borrow that $43,610 at the prime-credit average of 6.15% for 72 months and you pay $725.84 a month and $8,650 in interest.

If the car is new and assembled in the U.S., the 2025–2028 car loan interest deduction takes some of that back. For a single filer earning $85,000, with payments starting in January 2026, it saves about $1,392 in federal income tax over 2026–2028, so the interest costs $7,258 after tax. That's a useful discount, not a free loan. The calculator works out your own figures, year by year.

How your car payment is calculated

M = P × r(1 + r)ⁿ ÷ ((1 + r)ⁿ − 1) = monthly payment

P = amount financed, r = APR ÷ 12, n = months. Example: $43,610 at 6.15% for 72 months = $725.84.

The amount financed is where most of the work is. Start with the price you negotiated, then:

• subtract any rebate, your down payment and your trade-in value;
• add anything you still owe on the trade-in;
• add sales tax and fees if you roll them into the loan, or pay them at signing.

Each month, interest is charged on the remaining balance, so early payments are more interest and less principal. That matters for the deduction: the most deductible interest comes in the first years of the loan.

Car payment by loan amount and term

Monthly payment at the Q2 2026 average new-car rate of 6.35%, from the calculator:

So a $30,000 loan costs about $585 a month over five years. Every $10,000 borrowed adds roughly $195 to a 60-month payment at this rate.

The car loan interest deduction: who qualifies

The 2025 tax law (Public Law 119-21) lets you deduct up to $10,000 a year of interest on a loan for a new personal vehicle, for tax years 2025 through 2028 (26 U.S.C. § 163(h)(4)). The IRS published final rules on September 8, 2026, effective November 9 (Federal Register). To qualify:

• New vehicle. The original use has to start with you, so used cars don't count, even ones that are "new to you". A lease doesn't count, and buying out a lease usually doesn't either, because the original use began with the leasing company.
• Final assembly in the United States. The brand doesn't matter; the plant does. Check the "final assembly point" on the window sticker, or the plant code in the VIN with NHTSA's VIN decoder. The first character of a VIN shows where the maker is based, not where the car was assembled, so it isn't proof.
• The right kind of vehicle: a car, minivan, van, SUV, pickup or motorcycle with a gross vehicle weight rating under 14,000 pounds, made mainly for public roads.
• The right kind of loan: taken out after December 31, 2024, to buy the vehicle, and secured by a first lien on it. Credit-card purchases and loans from related parties (such as your spouse, parents, children or siblings, or a business you control) don't count, and nor do fleet purchases, salvage-title cars or vehicles bought for scrap.
• Mainly personal use. When you take out the loan you must expect to use the car more than half the time for personal purposes. Interest you already deduct as a business expense can't be counted twice.
• The VIN on your return. You claim it on Schedule 1-A, Part IV, and you must list the vehicle identification number (IRS Schedule 1-A).

You don't need to itemize: the deduction comes after adjusted gross income, so you can take it with the standard deduction. It lowers your taxable income but not your AGI. Lenders report interest of $600 or more on the new Form 1098-VLI, starting with 2026 interest, so expect one by January 31, 2027; if you paid less, you may not get one, but the interest still counts (IRS 1098-VLI instructions). For 2025, lenders only had to make the yearly interest total available, for example online or on a statement (IRS). You can include the deduction on your 2026 Form W-4, in the Deductions Worksheet, to get the saving in each paycheck instead of at tax time (Form W-4).

How much the deduction saves, year by year

The deduction is worth your tax rate times the interest you paid that year, not the interest itself. On the worked example ($43,610 at 6.15% for 72 months, $85,000 single, which puts the last dollars of income in the 22% bracket):

Three things shape the result:

• It ends after 2028. Interest you pay in 2029 and later isn't deductible unless Congress extends the law. Loans that start later get fewer deductible years.
• Interest falls each year as the balance shrinks, so the saving does too.
• Your bracket sets the value. Someone in the 12% bracket saves about half as much as someone in the 22% bracket on the same loan. Married couples earning $150,000 together are also in the 22% bracket, and save $1,392 on this loan.

Treasury figures reported in July 2026 suggest more than 1.4 million filers claimed the deduction for 2025, averaging a little over $1,800 each (WardsAuto). At a 12%–22% tax rate, that's roughly $220–$400 of tax saved per filer.

Most states don't give you this deduction automatically, because most start from federal AGI and the deduction comes after AGI. It tends to carry over only in the handful of states that start from federal taxable income, unless a state adopts it separately, and states keep changing their rules (Tax Foundation, July 2025). Check with your state's revenue department; the calculator counts federal tax only.

The income phase-out

The deduction shrinks by $200 for each $1,000, or part of $1,000, of modified AGI over $100,000 ($200,000 on a joint return). The limits aren't adjusted for inflation. The $10,000 maximum is gone at $150,000 ($250,000 joint), and a smaller amount of interest disappears sooner (26 U.S.C. § 163(h)(4); Schedule 1-A). For a single filer:

Because a partial $1,000 counts as a full one, $500 over the line costs you $200 of deduction. Modified AGI is your AGI plus any foreign or territory income you excluded. Pre-tax 401(k) and HSA contributions lower AGI, so they can bring you back under the line.

Trade-ins, negative equity and the deduction

If you owe more on your trade-in than it's worth, the dealer usually adds the difference ("negative equity") to your new loan. The final rules say that part of the loan isn't for buying the new car, so its interest isn't deductible. Interest is split in proportion to the loan, and a down payment is counted against the negative equity first (T.D. 10054; proposed regulations).

The tax saved is the same in both cases, because the part of the loan that paid for the car is $36,000 either way. What the down payment does is remove the interest you could never deduct. Rolling negative equity in also means you start out owing more than the car is worth, which is risky if it's stolen or totaled. Enter what you still owe in the calculator to see the effect on your loan and your deduction.

48 vs 60 vs 72 vs 84 months

Longer loans lower the payment but raise the interest, and the deduction doesn't change that. Edmunds data shows 25.5% of new-car loans in Q3 2026 ran 84 months or more, a record, and 21.2% of financed new-vehicle purchases came with payments of $1,000 a month or more (Auto Remarketing). Same $43,610 loan at 6.15%, starting January 2026, $85,000 single:

Going from 72 to 84 months adds $1,518 of interest but only $65 of extra tax savings, because the added interest falls in 2029 and later, after the deduction ends. A 48-month loan costs $2,728 less after tax than 72 months; the 60-month loan sits between, at $5,858. Rates differ by lender and term, so ask for a quote at each term you're considering.

How much car can you afford? The 20/4/10 rule

A common rule of thumb, not an official standard, is 20/4/10: put at least 20% down, borrow for no more than four years, and keep total car costs under 10% of your gross income. Versions differ on what counts as car costs; the calculator uses the payment plus the insurance you enter, and shows the payment as a share of take-home pay too. At $85,000 a year, 10% of gross income is $708 a month.

Few buyers meet all three today. With the average new-car price at $50,089 in August 2026 (Kelley Blue Book), 20% down means about $10,018 in cash or trade-in equity. Treat the rule as a stress test. If your payment fails it, a cheaper car, a bigger down payment or a shorter loan you can afford will save more than any deduction. The budget calculator shows how the payment fits with everything else.

Average car loan rates by credit score

Rates: Experian, State of the Automotive Finance Market, Q2 2026. Payments from the calculator.

On the same $40,000 loan, a subprime borrower pays $10,603 more interest than a super-prime borrower. Raising your score before you buy, or getting preapproved by a bank or credit union so you can compare with the dealer's offer, often saves more than the deduction. Choose your tier in the calculator to fill in the average rate, or pick "I have a quote" and enter your own.

Sales tax, fees, rebates and your trade-in

• Trade-ins usually cut your sales tax. Most states tax only the difference between the price and your trade-in. California, Hawaii and Virginia tax the full price, and Michigan and Ohio limit the credit (Bankrate). Set "Trade-in lowers sales tax?" to match your state.
• Rebates often don't. In many states a manufacturer rebate doesn't reduce the taxable price, while a dealer discount does. The calculator taxes the price before the rebate; enter dealer discounts as a lower price. Rules vary, so check your state's.
• A few states have no general sales tax on cars, but may charge title or other fees instead. Use the rate where you'll register the car, including local tax.
• Dealer documentation fees range from under $100 in states that cap them to close to $1,000 in some states that don't (CarEdge). Ask for the out-the-door price in writing.
• Rolling tax and fees into the loan means you pay interest on them. Under the final rules they're part of the qualifying loan, so that interest can still count toward the deduction.

Paying off early or refinancing

Extra payments go straight to principal and cut your interest. On the worked example, an extra $100 a month saves $1,277 of interest and finishes 10 months sooner. It also lowers your deductible interest slightly, costing $75 of tax savings, so you still come out well ahead. Paying off a car early only makes sense once you have an emergency fund and no higher-rate debt. Check your contract for prepayment terms first.

Refinancing a qualifying loan keeps the deduction only up to the balance you refinance, and only if the new loan is secured by the same car. Unpaid interest rolled into the new loan can count; cash you take out, and new add-ons financed in the refinance, don't (final regulations). The debt payoff calculator compares paying down the car against your other debts.

Common myths about “no tax on car loan interest”

• “It's a $10,000 tax break.” It's a deduction of up to $10,000 of interest. The tax saved is the interest times your tax rate, usually a few hundred dollars a year.
• “It's above the line.” It isn't: it doesn't lower AGI. You can take it without itemizing, but AGI-based limits elsewhere don't change.
• “There's a price cap.” The law has no limit on the vehicle's price, only the $10,000 cap on interest and the income phase-out.
• “A VIN starting with 1, 4 or 5 qualifies.” The first VIN character shows the maker's country, not the final assembly plant. Check the window sticker or the plant code.
• “Married couples get $20,000.” The $10,000 limit applies per return, so a joint return gets $10,000. Each spouse filing separately can claim up to $10,000 on their own return (proposed regulations).
• “Used cars count if they're new to me.” They don't: original use has to begin with you.

Common questions

How much is the payment on a $40,000 car loan?

At the average new-car rate of 6.35%, $780 a month over 60 months or $670 over 72, before any down payment.

Is car loan interest tax deductible?

For 2025 through 2028, yes, if the loan is for a new vehicle with final assembly in the U.S., bought mainly for personal use and secured by the car, up to $10,000 a year and subject to an income phase-out. Otherwise, interest on a personal car loan isn't deductible.

Do I have to itemize to claim the car loan interest deduction?

No. You claim it on Schedule 1-A and can take it with the standard deduction.

Does a used car qualify?

No. The original use has to start with you, so only new vehicles qualify. Lease buyouts usually don't qualify either.

How do I know if my car was assembled in the U.S.?

Look for the final assembly point on the window sticker, or decode the VIN's plant code with NHTSA's VIN decoder. From 2026, your lender's Form 1098-VLI also says whether final assembly was in the U.S.

What if I refinance my car loan?

The new loan qualifies up to the balance of the old qualifying loan, if it's secured by the same car. Cash out and new add-ons don't count.

Is it better to take a 60- or 72-month loan?

The 60-month loan costs more each month but less overall: on $43,610 at 6.15%, $1,401 less interest after tax. Choose the shortest term you can comfortably afford.

What happens if I owe more on my trade-in than it's worth?

The difference is usually added to your new loan. You'll pay interest on it, and that interest isn't deductible. A down payment covers the negative equity first.

Does the deduction lower my state income tax?

Usually not. Most states start from federal AGI, which the deduction doesn't change. Check your state's rules.

When does the car loan interest deduction end?

After the 2028 tax year. Interest paid in 2029 or later isn't deductible unless Congress extends it.

Sources

1. 26 U.S. Code § 163(h)(4): qualified passenger vehicle loan interest — Legal Information Institute, Cornell Law School. Accessed October 14, 2026.
2. Car loan interest deduction: final regulations (T.D. 10054, 91 FR 57214, September 8, 2026) — Internal Revenue Service, Federal Register. Accessed October 14, 2026.
3. Qualified passenger vehicle loan interest: proposed regulations (REG-113515-25, 91 FR 67, January 2, 2026) — Internal Revenue Service, Federal Register. Accessed October 14, 2026.
4. Schedule 1-A (Form 1040): Additional Deductions (2025) — Internal Revenue Service. Accessed October 14, 2026.
5. Instructions for Form 1098-VLI, Vehicle Loan Interest Statement (2026) — Internal Revenue Service. Accessed October 14, 2026.
6. Treasury, IRS provide transition relief for 2025 for businesses reporting car loan interest (IR-2025-105, Notice 2025-57) — Internal Revenue Service. Accessed October 14, 2026.
7. Form W-4 (2026) — Internal Revenue Service. Accessed October 14, 2026.
8. VIN decoder (vPIC) — National Highway Traffic Safety Administration. Accessed October 14, 2026.
9. Average car loan interest rates by credit score (State of the Automotive Finance Market, Q2 2026) — Experian. Accessed October 14, 2026.
10. Average car payment (Q2 2026) — Experian. Accessed October 14, 2026.
11. Edmunds Q3 2026 auto finance data (record share of 84-month loans) — Auto Remarketing. Accessed October 14, 2026. Secondary report of Edmunds data.
12. Kelley Blue Book average new-vehicle transaction price, August 2026 — Digital Dealer. Accessed October 14, 2026. Secondary report of Cox Automotive data.
13. Does a trade-in reduce sales tax? — Bankrate. Accessed October 14, 2026. Secondary source.
14. Car dealer doc fees by state — CarEdge. Accessed October 14, 2026. Secondary source.
15. State conformity with the One Big Beautiful Bill Act (July 2025) — Tax Foundation. Accessed October 14, 2026.
16. Car loan interest tax deduction disappoints dealers, lenders — WardsAuto. Accessed October 14, 2026. Secondary report of Treasury figures.

Market data as of Q2 2026 (Experian) and Q3 2026 (Edmunds). Research checked October 14, 2026. We're not tax advisers; for your own return, check the IRS instructions or a tax professional.