Interest on Car Loans: Can You Deduct It?

14 October 2025

Buying a car is a big financial decision, and for most people, taking out a car loan is the only way to afford one. But what about the interest on that loan? Can you deduct it on your taxes? The short answer is: yes and no. It depends on how you use the vehicle and a few other factors.

In this guide, we'll break down everything you need to know about deducting car loan interest, including when it's possible and when you're out of luck.

Understanding Car Loan Interest

Before diving into tax deductions, let’s first understand what car loan interest actually is.

Whenever you finance a vehicle, the bank or lender charges you interest on the amount borrowed. This is their way of making money on the loan. Over time, you end up paying more than the actual price of the car because of the interest.

That extra cost adds up, which is why many people wonder if they can write it off during tax season. Unfortunately, the IRS doesn’t allow personal auto loan interest deductions in most cases. However, there are some exceptions.

When Is Car Loan Interest Deductible?

While personal car loans don’t qualify for tax deductions, there are specific situations where you might be able to claim that interest. Here’s when you can:

1. If You Use the Car for Business Purposes

If you’re self-employed or own a business and use your vehicle primarily for work, the IRS considers it a business expense. In this case, you can deduct the interest on your car loan.

How Much Can You Deduct?

The amount you can write off depends on how much you use the car for business. If you use your car:

- 100% for business, you can deduct 100% of the interest.
- 50% for business, you can deduct 50% of the interest.
- Less than 50% for business, you might still deduct a portion, but keep detailed records.

To claim this deduction, you’ll need to file Schedule C (Profit or Loss from Business) along with your tax return.

2. For a Vehicle Used by an Employee (Employer-Owned Cars)

If you’re an employer and you finance a vehicle for your employees to use for work-related tasks, you may be able to deduct the interest as a business expense. However, this applies only if the vehicle is directly used for business purposes.

3. If You Have an Auto Loan for a 1099 Independent Contractor Job

Driving for Uber, Lyft, or delivering for DoorDash? As an independent contractor, your vehicle is part of your business, and that means you can likely deduct a portion of the interest on your car loan.

Again, you’ll need to determine the percentage of time you use your car for business versus personal use. Keep logs of your mileage to support your claim.

4. If You Took a Home Equity Loan to Buy the Car

Here’s an interesting loophole: If you took out a home equity loan or line of credit (HELOC) and used that money to buy a car, you might be able to deduct the interest.

Why? Because mortgage interest on a home equity loan is deductible if the loan is used for qualified expenses—which, up until tax law changes in 2018, used to include cars. However, tax laws change frequently, so it's best to check with a tax professional to see if that deduction still applies in your situation.

When Is Car Loan Interest NOT Deductible?

Unfortunately, most car buyers won’t qualify for a tax break on their vehicle loan interest. Here are common cases where you cannot deduct it:

- If the car is used for personal purposes only: The IRS does not allow personal auto loan interest deductions under typical circumstances.
- If you’re a W-2 employee using your car for work: Even if you drive a lot for your job, unless you’re self-employed, your loan interest isn’t deductible. Your employer may reimburse mileage, but that’s about it.
- If you use the standard mileage deduction: If you already deduct mileage for business purposes, you cannot also deduct car loan interest. The IRS won’t let you double-dip.

Alternative Tax Deductions for Car Owners

While you may not be able to deduct car loan interest in most cases, there are other vehicle-related tax breaks you might qualify for.

1. Mileage Deduction

If you use your car for business, the IRS allows you to deduct a set amount per mile driven. As of 2024, the standard mileage rate is 67 cents per mile for business use.

This method is often easier than tracking actual expenses like gas, maintenance, and insurance. However, if you choose to deduct mileage, you cannot also deduct car loan interest.

2. Vehicle Depreciation Deduction

If you use your car for business, you can deduct depreciation, which accounts for the loss of value over time. The IRS has specific guidelines, and you’ll need to keep records of your car’s business use percentage.

3. State and Local Tax Deductions

Some states allow you to deduct personal property taxes on your car. While this isn’t a federal deduction, it can still help reduce your overall tax burden.

4. EV and Hybrid Tax Credits

If you purchased an electric vehicle (EV) or a plug-in hybrid, you might qualify for a federal tax credit ranging from $2,500 to $7,500, depending on the vehicle. State incentives may also be available.

How to Keep Track for Tax Deductions

If you plan to deduct any part of your car expenses, including loan interest (when eligible), keeping accurate records is a must. The IRS may ask for documentation, and sloppy bookkeeping can lead to denied deductions.

Here’s what you should track:

✔️ Mileage logs – Record business vs. personal miles driven.
✔️ Loan statements – Keep track of interest paid.
✔️ Receipts – Gas, maintenance, insurance, and other expenses.
✔️ Business use percentage – Breakdown of how you use the car.

Several mobile apps can help track mileage and expenses, including MileIQ, Everlance, and QuickBooks Self-Employed.

Final Thoughts

While most people can’t deduct their car loan interest, business owners and self-employed individuals might have an opportunity to do so. If you use your car primarily for business, keep excellent records and consult a tax professional to maximize deductions.

For everyone else, tax credits and other deductions may still help offset the cost of vehicle ownership. While the IRS won’t let you write off your new car’s interest, there’s always another way to save money come tax time!