Most car loan interest is not tax-deductible
The short answer: you cannot deduct interest on a personal car loan. The IRS allows you to deduct interest only on loans used for business, investment, or a home. A car you drive to work, to the store, or for personal errands does not may have access to, even if you use it occasionally for work.
This rule applies whether you financed the car through a bank, credit union, or the dealership. The type of lender does not matter. What matters is what you use the car for.
The one exception is if you use the car primarily for business — meaning you are self-employed and use it as a tool of your trade, not just commuting to a job. Even then, the rules are strict and the IRS watches these claims closely.
Key Takeaways
- Interest on a car loan for personal use is never deductible, regardless of the lender or loan terms.
- Self-employed people can deduct mileage or actual expenses for a car used in their business, but not the loan interest itself.
- Commuting to a job — even a job you drive to every day — does not make the interest deductible.
- A home equity loan used to buy a car may have deductible interest, but only if the loan is secured by your home and meets IRS limits.
When self-employed people can deduct car expenses
If you are self-employed and use a car for your business, you can deduct car expenses — but not the loan interest itself. Instead, you deduct either the actual expenses (gas, insurance, repairs, depreciation) or the standard mileage rate, whichever is larger.
The standard mileage rate for 2024 is 67 cents per business mile (this rate changes yearly). You track the miles you drive for business and multiply by the rate. You do not deduct the loan payment; you deduct the mileage.
If you choose actual expenses instead, you can deduct depreciation, which is a way of spreading the car's cost over several years. Depreciation is not the same as loan interest, but it does account for the car losing value. You cannot deduct both the mileage rate and actual expenses in the same year — you pick one method.
To claim either deduction, you must keep records: a mileage log for business trips, or receipts for gas, insurance, maintenance, and registration. The IRS asks for these if you are audited.
Home equity loans and car purchases
There is one scenario where car-related interest might be deductible: if you borrow against your home to buy a car. A home equity loan or home equity line of credit (HELOC) is secured by your house, and interest on these loans can be deductible — but only up to certain limits.
As of 2024, you can deduct interest on up to $750,000 in home equity debt (or $375,000 if you are married filing separately). The loan must be secured by your primary home or a second home. The money can be used for anything, including buying a car.
However, this route is riskier than a regular car loan. If you cannot pay back a home equity loan, the lender can foreclose on your house. A regular car loan only puts the car at risk. Most people do not borrow against their home to buy a car for this reason.
If you do use a home equity loan to buy a car, you will need to track which portion of the loan went to the car purchase and calculate the interest on that portion. Your lender can help you with this.
Why the IRS does not allow personal car loan deductions
The IRS treats personal car loans the same way it treats most consumer debt: the interest is a personal expense, not a business or investment expense. You cannot deduct credit card interest, student loan interest (with rare exceptions), or personal loan interest either.
The logic is that you are using the car for personal benefit — transportation — not to generate income. Even if you drive the car to work every day, the IRS sees commuting as a personal choice about where you live and work, not a business expense.
This is different from a business owner who buys a truck to haul materials or a delivery driver who uses a van as part of their job. Those are tools of the trade, and the expenses are deductible.
What you can deduct instead
If you own a car and pay interest on the loan, you cannot deduct that interest on your federal taxes. However, you may be able to deduct other car-related costs depending on your situation.
If you are self-employed, you can deduct mileage or actual expenses for business use. If you use your car to volunteer for a may have access to charity, you can deduct mileage at the IRS volunteer rate (currently 14 cents per mile, but this changes yearly). If you are an employee and your employer requires you to use your own car for work, you may be able to deduct unreimbursed expenses, though this deduction has been limited since 2018.
State and local taxes (SALT) deduction sometimes includes vehicle registration fees, but not loan interest. Check your state's rules, as they vary.
How to report car expenses on your tax return
If you are self-employed and deducting car expenses, you report them on Schedule C (Profit or Loss from Business) when you file your federal tax return. You list the total mileage or actual expenses under the appropriate category — vehicle expenses, depreciation, or mileage.
If you are an employee deducting unreimbursed work expenses, you report them on Schedule A (Itemized Deductions) as miscellaneous expenses, though the deduction is limited and subject to a threshold. Many employees find it does not reduce their taxes because the threshold is high.
Keep all records — mileage logs, receipts, loan statements — for at least three years in case the IRS asks questions. If you are audited, these records are your proof.
Frequently Asked Questions
Can I deduct car loan interest if I use the car for work sometimes?
No. Using the car for work part of the time does not make the loan interest deductible. You can deduct the mileage or expenses for the business miles you drive, but not the loan interest itself. The interest is tied to the loan, not to how you use the car.
What if my employer pays me back for mileage — can I deduct the interest then?
No. Reimbursement from your employer does not change the tax treatment of the loan interest. The interest is still personal debt. However, if your employer does not reimburse you for mileage, you may be able to deduct the unreimbursed mileage as a work expense (subject to limits).
Is car loan interest deductible in any state?
No state allows you to deduct personal car loan interest on state income tax either. The rules are the same at the state and federal level. Some states have different rules for business use, so check your state's tax guide if you are self-employed.
Can I deduct interest on a car loan if I use it as a rental or rideshare vehicle?
If you use the car for rideshare (like Uber or Lyft) or rent it out, you are running a business. You can deduct actual expenses or mileage for that business use, but still not the loan interest itself. You can deduct depreciation, which spreads the car's cost over time.
What is the difference between deducting mileage and deducting loan interest?
Mileage deduction is a flat rate per mile driven for business. Loan interest is the cost of borrowing money. The IRS does not allow you to deduct the interest, but it does allow you to deduct the mileage (or actual expenses) for business use. These are separate things.