Car Loans in 2026: Rates, Terms, and the New Car-Loan Interest Deduction

01Quick answer: what changed for car loans in 2026?

As of June 3, 2026, the average new-car loan rate is 6.98% APR on a 60-month term, and a new federal law lets eligible buyers deduct up to $10,000 of car-loan interest per year for tax years 2025 through 2028. The deduction only covers new vehicles with final assembly in the United States — used cars and leases are excluded.

You don't have to itemize to claim it. The deduction phases out above $100,000 MAGI for single filers and $200,000 for married couples filing jointly.

02What are car loan interest rates in 2026?

The current auto loan rate is 6.98% APR for a 60-month new car loan as of June 3, 2026, according to Bankrate's weekly survey. Average APRs run roughly 6.78% for new cars and 12.01% for used cars, per LendEDU. Used cars cost more to finance because they're riskier collateral for the lender.

Your rate depends heavily on your credit. Super-prime borrowers see rates as low as 5.25%, while subprime borrowers (501–600 score) average 13.18% on new cars and 18.86% on used cars. Experian data shows super-prime borrowers averaged 4.66% on new-car loans in Q4 2025, versus 16.01% for deep-subprime borrowers. LendingTree puts the full offer range at 6.81% to 23.82% APR.

Before you shop, run your numbers through our free tax-leak calculator and read the Money Moves Guide to make sure your budget can absorb the payment.

03How long are car loans in 2026, and is longer worse?

The average auto loan term in Q1 2026 was 69.48 months for new cars and 67.73 months for used cars, according to Experian. The most common terms are 24, 36, 48, 60, 72, and 84 months, with some lenders stretching to 96 months.

Longer terms lower your monthly payment but raise total interest paid — and they keep you "underwater" (owing more than the car is worth) for longer. Middle-tier credit borrowers (601–660) take the longest new-car loans at an average of 75.1 months, while top-tier borrowers (781–850) average the shortest at 64.5 months.

Term length also affects how much of the new deduction you can use. Interest is front-loaded early in the loan, so a longer loan spreads more deductible interest across the deduction's 2025–2028 window — but it also means you pay more interest overall.

04How much does a car actually cost in 2026?

In October 2025, the average new-car transaction price topped $50,000 for the first time. Americans borrow an average of $43,582 for new vehicles and $27,528 for used vehicles, according to Experian.

Average monthly payments are roughly $767 for a new car, $537 for a used car, and $613 for a lease. New-car payments rose 2.8% year-over-year in Q4 2025, while used and leased payments rose 1.7% and 1.5%. The average down payment on new vehicles in early 2026 was about 13–14%.

Don't forget the rest of the bill. AAA estimates the total cost of owning a new vehicle at $11,577 per year once you add insurance, fuel, maintenance, and depreciation. Compare that against your other big borrowing decisions, like buying your first home in 2026, before you commit.

05What is the new car-loan interest deduction?

The "No Tax on Car Loan Interest" deduction is part of the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025. It lets eligible taxpayers deduct up to $10,000 in car-loan interest per tax return each year for tax years 2025 through 2028.

It's an above-the-line deduction, meaning it reduces your income before your AGI is calculated — and you can claim it whether you take the standard deduction or itemize. That's a sharp contrast to the mortgage-interest deduction, which only itemizers can use.

There's no limit on the number of auto loans you can claim, as long as each vehicle meets every requirement. The non-partisan Joint Committee on Taxation estimates the deduction will cost $31 billion from fiscal years 2025–2034.

06Which cars and buyers qualify for the deduction?

The rules are strict. The vehicle must be purchased new — used vehicles and leases do not qualify. The loan must have originated after December 31, 2024, and the vehicle must be purchased between January 1, 2025 and December 31, 2028.

"Final assembly in the United States" is the key test — not vague marketing language. The IRS encourages buyers to use the NHTSA VIN Decoder or check the vehicle information label at the dealer to confirm the plant of manufacture. If you use the car partly for a business (say, 60% business and 40% personal), you can't claim the full personal deduction; the vehicle must be purchased for personal use.

07How does the income phase-out work?

The deduction phases out for higher earners. Once your modified adjusted gross income (MAGI) passes $100,000 for single filers or $200,000 for married couples filing jointly, the maximum deduction shrinks at a rate of $200 for every $1,000 over the threshold.

That means a single filer with a MAGI of $120,000 would see the deduction reduced by $4,000, and the deduction fully phases out around $120,000 MAGI for single filers. Lowering your MAGI through 401(k) or HSA contributions can keep more of the deduction in play.

At the top 37% bracket, the deduction is worth up to $3,700 in tax savings per year.

08How do you claim the car-loan interest deduction?

For 2025, your lender provides a statement of interest paid by January 31, 2026. Starting in 2026, lenders must issue Form 1098-VLI (Vehicle Loan Interest Statement) by January 31 for any loan where you paid $600 or more in interest during the year.

1. Confirm the vehicle's U.S. final assembly using the NHTSA VIN Decoder.
2. Gather your lender's interest statement (or Form 1098-VLI for 2026+).
3. Complete Form 1040, Schedule 1-A, Part IV ("No Tax on Car Loan Interest").
4. Enter the VIN, total vehicle loan interest paid, and apply the phase-out calculation.
5. Keep your purchase records, loan documents, and VIN verification.

If you refinance a qualifying vehicle, you're generally still eligible to deduct interest — but only on the balance of the original loan, and only if the original loan and vehicle met all the rules. For more filing help, browse our other guides on the blog.

09What happened to the EV tax credit?

The OBBBA eliminated the federal electric-vehicle tax credit. As of October 1, 2025, there are no federal tax credits for any new or used electric vehicle. The credits previously offered up to $7,500 for new EVs and $4,000 for used EVs; both terminated September 30, 2025.

The new car-loan interest deduction acts as a partial trade-off, but it works very differently — it's a deduction (reducing taxable income), not a dollar-for-dollar credit. State-level EV incentives may still apply where you live, so check your state before assuming the math.

If a U.S.-assembled EV fits your needs, the loan-interest deduction can still apply, since EVs aren't excluded as long as they meet the assembly and weight rules.

10How do tariffs affect 2026 prices, and how do you get the best rate?

New-vehicle prices jumped $1,315 on average in Q1 2026 compared to a year earlier, largely driven by tariffs, according to Cars.com. Imported vehicles saw the biggest increases — some models rose $5,000 to $8,900 — while domestically built vehicles rose less, roughly $1,600 to $2,000. That gives U.S.-assembled cars an extra edge, and those are also the cars that qualify for the new deduction.

The same discipline applies to all your debt. If you're juggling payments, see how student loan repayment changed in 2026 so you can prioritize correctly.