Don’t expect ‘Big, Beautiful Savings’ on an auto loan tax deduction
Congress’s recently passed “Big, Beautiful Bill” generated buzz among drivers with its auto loan interest tax deduction that’s capped at $10,000 annually. However, an industry expert at Caribou, a leading auto refinance platform, has highlighted that only a small percentage of drivers will qualify for this tax break, and for those who do, the savings will likely be underwhelming. Based on Experian’s typical new car loan amount of $41,720, an average interest rate of 6.73%, and a loan term of 68.63 months, Caribou estimates that fewer than 3% of the 100 million Americans with auto loans, approximately 2.8 million Americans, will qualify for the new tax deduction.
For those who do qualify, the average annual tax savings will be approximately $333, not $10,000. To qualify for the tax break, a vehicle must have been purchased on or after January 1, 2025, it must be for personal use and assembled in the United States, and the deduction begins phasing out at a modified adjusted gross income (MAGI) of $100,000 for single filers ($200,000 for joint filers), with no deduction available if your MAGI exceeds $149,000 ($249,000 for joint filers). Caribou’s 3% estimation is also based on about 13 million new cars expected to be sold for personal use in 2025, roughly 50% of new vehicles sold in the U.S. being assembled domestically, about 57% of new cars being financed with a loan, and approximately 76.1% of U.S. consumers falling below the income thresholds for the full deduction.
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Caribou describes how refinancing can help drivers achieve more savings on monthly payments and total interest
When asked if the auto loan interest deduction may change consumer decisions on whether to finance, lease, or pay outright for a new vehicle, given that leases and used vehicles are excluded from eligibility, Caribou Financial President Eric Stradley said: [The Bill’s] auto loan interest deduction is narrowly targeted—limited to certain new U.S.-assembled vehicles and excluding used cars, leases, and as a result, most buyers. Because so few consumers qualify due to vehicle type, assembly location, or income limits, the deduction is unlikely to shift most purchase decisions. For the vast majority, personal needs, budget, and preferences still drive the choice, with little impact from the new law.”
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Caribou noted in its report that those not meeting the auto loan tax break’s eligibility requirements can lower their monthly payments and reduce total interest costs through refinancing, since the method is achievable regardless of a car’s age, type, where it was assembled, or a driver’s income level.
Stradley described what pitfalls borrowers should watch for when refinancing, and how Caribou helps its clients avoid these mistakes: “Our advisors work closely with each customer, taking time to understand individual goals, whether that means lowering monthly payments or paying off a loan faster. We guide customers through the refinancing process by providing clear and transparent information about rates, terms, and fees. Borrowers should stay alert during refinancing, watching for hard credit checks that could affect credit scores, hidden fees, and costly add-ons that they don’t need, which might get bundled into new loans. Caribou helps customers avoid these pitfalls by offering upfront disclosures, soft credit checks for pre-qualification, and dedicated loan advisor support.”
Final thoughts
Auto loan interest deductions seemed like a highlight of Congress’s Big, Beautiful Bill, but the number of drivers set to qualify and their savings appear slim. As Caribou Financial President Eric Stradley highlighted, personal needs and budgets will be the primary drivers of purchase decisions, and refinancing can be a practical option for achieving savings. Still, borrowers should approach refinancing carefully.