Buying a car: the total-cost arithmetic, and what the 2025–2028 interest deduction is worth
A $35,000 car at 8% over 72 months costs $44,184. The same car at 5% over 60 months costs $39,630. The monthly payment is lower on the first. That is the whole trick.
Car finance is sold on the monthly payment because the monthly payment can be made to say anything. Stretch the term, lower the number. The total cost goes the other way, and it is the total cost the buyer pays.
The same car, three loans
| Rate | Term | Monthly | Total paid | Interest |
|---|---|---|---|---|
| 8% | 72 months | $614 | $44,184 | $9,184 |
| 8% | 60 months | $710 | $42,580 | $7,580 |
| 5% | 60 months | $660 | $39,630 | $4,630 |
Against the 60-month loan at the same 8% rate, the longer term lowers the payment from $710 to $614 and raises the interest paid from $7,580 to $9,184. The extra year of payments is the cost of the lower number. At the 5% rate the 60-month loan is cheaper on both measures — the rate is the lever that moves total cost most.
The part the loan does not show: depreciation
A new car loses a large share of its value in the first years — commonly a fifth to a third by the end of the first year and around half by the end of the third, with wide variation by model. On a $35,000 car, a 30% first-year loss is $10,500. For most buyers that is the single largest cost of the first year of ownership, larger than the interest, the fuel or the insurance, and it does not appear on any statement.
It also creates the position the finance industry calls negative equity: a 72-month loan pays down principal slowly, the car's value falls quickly, and for the first two to three years the loan exceeds the car. A buyer who needs to sell in that window pays the difference.
The 2025–2028 interest deduction
The One, Big, Beautiful Bill, signed July 4, 2025, created a deduction for interest on a loan used to buy a new car for personal use, for tax years 2025 through 2028. The details, from the IRS:
- Up to $10,000 of interest a year.
- The vehicle must be new, for personal use, and have had its final assembly in the United States.
- The deduction phases out above $100,000 of modified adjusted gross income ($200,000 for joint filers).
- It is available whether or not the taxpayer itemizes.
First-year interest on that loan is roughly $2,640. At the 22% bracket, deducting it saves $581. Real, and smaller than the $3,000 difference between the 8% and 5% loans over their life. Illustrative; the first-year interest is the largest, since the balance is highest.
What the numbers say together
- The rate matters more than the term, and the term matters more than the deduction.
- A used car two or three years old has had its steepest depreciation paid by someone else.
- The total cost of a car is price + interest + depreciation + insurance + fuel + maintenance, and the loan document shows one of the six.
Sources
- Working Families Tax Cuts — individuals and workers (car loan interest deduction)Internal Revenue Service · checked Sep 24, 2026
- Auto loan answers: key termsConsumer Financial Protection Bureau · checked Sep 24, 2026