Is interest on your car loan tax deductible?

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Deducting auto loan interest on your income-tax return is not typically allowed. But if you’re self-employed and use your car for business, you may be able to write off at least a portion of your interest payment. Of course, any time you’re dealing with taxes and the IRS, it’s important to follow the rules, keep accurate records and be cautious about claiming any deduction. If you’re unsure about whether this particular tax strategy is right for you, you may want to consult with a professional advisor.

 

Related: Pros & cons of refinancing a car

What Is Auto Loan Interest?

Auto loan interest is what you pay when you borrow money from a lender to finance the purchase of a car, a truck or some other type of vehicle. When you make your payment every month, a portion of the money goes toward paying the interest you owe and the rest goes toward the principal balance. Because auto loans are secured loans—the car is your collateral—the interest rates are typically lower than they are for unsecured loans. Still, over time (the average new car loan is about 70 months), paying interest can make buying your car much more expensive. So, you can’t blame car owners for wondering if and how they could write off those monthly interest charges on their taxes the way they can with a home mortgage or a qualified student loan.

Is Auto Loan Interest Deductible?

Unfortunately, car loan interest isn’t deductible for all taxpayers. Should you use your car for work and you’re an employee, you can’t write off any of the interest you pay on your auto loan. But if you own your business or you’re self-employed, it’s a different story. You can, with some limits, deduct the interest you pay on debts that are directly connected to your business. And that may include the interest on an auto loan if the car is for work, or for work and personal use. Here’s how that breaks down depending on how you use the car.

1. If You Financed a Personal Vehicle

If you’re a freelancer, independent contractor, gig worker or small business owner, chances are you use your car for work at least part of the time. This means that even if you financed the car as a personal vehicle, you still may be able to write off some of the loan interest as a car-related business expense (just as you might deduct other costs, such as gas, tolls and licenses) on Schedule C of your tax return. The amount you can deduct will depend on how you use your car. For example, if your car use was 60% business and 40% personal (based on the total miles you drove in the tax year), you can deduct only 60% of the amount of interest paid.

2. If You Financed a Business Vehicle

If you own a small business or operate as a limited liability company (LLC), you may have financed your car with a business or commercial auto loan, using your business name and making payments with your business bank account. If that’s the case, it’s likely you’re using the car or truck solely for business purposes. (The lender may even require that you document how you’ll use the car.)  And that means you can write off 100% of your car interest costs for the year.

How Do You Write Off Car Loan Interest?

There are two ways to deduct car loan interest on your tax return, and there are pros and cons regarding each, depending on how you use your car. If you qualify to use both methods, you may want to run the numbers to determine which might be better for you.

 

Both methods require tracking your business and personal mileage for the year as well as some car expenses. So, no matter which one you choose, you’ll want to keep complete, clear, and organized records to make things easier when you fill out your tax return, and to use as backup in case the IRS questions the deduction.

Actual Expenses Method

If you choose to use the actual expenses method, you can deduct all eligible car expenses that were directly related to your work in that tax year—including auto loan interest. But remember, you can write off only the portion that was used for business. IRS Publication 463, “Travel, Gift, and Car Expenses,” lists actual car expenses as:

  • Depreciation (with limits)
  • Licenses and registration fees
  • Gas and oil
  • Tolls
  • Lease payments (with limits)
  • Insurance
  • Garage rental and parking fees
  • Repairs
  • Tires
  •  Interest (if you are self-employed and use the car for business)
  • Personal property taxes

Standard Mileage Rate Method

If you opt for the standard mileage deduction, your main record-keeping focus will be on the number of business miles you drive. To calculate your deduction, you’ll multiply the business miles for the year by the IRS-established standard mileage rate. (That’s 56 cents per mile for 2021.)

 

If you decide to use the standard mileage rate method, you can’t deduct all of your car’s costs as you would with the actual expense method. Many of those costs—including gas, oil, registration fees, insurance, maintenance and repairs—are already factored into the standard mileage rate.

 

But you still can deduct the business portion of your car loan interest, as well as business-related parking fees and tolls, and personal property taxes on the vehicle. Taxpayers who choose the standard mileage rate method must use it in the first year the vehicle is available for business use. After that, they can switch back and forth between the standard mileage rate method and the actual expenses method.

Can Auto Loan Interest Be Deducted If It Isn’t a Business Expense?

The IRS lists five types of interest that are deductible on an income tax return.

  •  Investment interest
  • Qualified mortgage interest
  • Student loan interest
  • Non-farm business interest
  • Farm business interest

Unless you’re using a vehicle you financed for non-farm or farm business, you shouldn’t expect to get a tax deduction for the interest you pay on an auto loan. You may have heard that you could use a home equity loan or home equity line of credit (HELOC) to pay for a car and deduct the interest. This is no longer the case. The Tax Cuts and Jobs Act of 2017 suspended until 2026 the deduction for interest paid on home equity loans and lines of credit unless they are used to “buy, build or substantially improve the taxpayer’s home that secures the loan.”

Is There a Tax Benefit to Auto Loan Refinancing?

Refinancing a car loan may be an option worth considering if you’re looking to free up some cash flow for business or personal needs. And though it might not be the primary reason to refinance, as a bonus there could be some tax benefits should you go that route.

 

Let’s say your pickup is worth $8,000 and you owe just $4,000. If you refinanced for $6,500, you’d still owe less than what the truck is worth, and you’d have $2,500 leftover after you paid off the old loan. You could put that money into your business or use it to tide you over between freelancing jobs. And as long as you’re using the truck for business, you can write off at least a portion of the interest on your taxes each year.

 

Refinancing also may be a strategy worth exploring if you hope to lower your car payments by qualifying for a lower interest rate, by extending the length of the loan, or, if possible, doing both. Keep in mind, though, that if the length of the loan is extended, you could end up paying more in interest over the long haul—so you’ll want to find the best loan available. It can be helpful to use a comparison site like Lantern to review the refinancing rates and terms lenders are currently offering, then crunch the numbers before deciding to move to a new loan.

The Takeaway

You can’t deduct your car payments on your taxes, but if you’re self-employed and you’re financing a car you use for work, all or a portion of the auto loan interest may be tax-deductible. The amount you can deduct will depend on how many miles you drive for business vs. personal use. And you’ll have to track your mileage and keep good records in order to file an accurate tax return. But writing off the loan interest could help cut the cost of using your car for work. So, if you’re financing your car—or thinking about refinancing your auto loan—deducting the interest and other car expenses may be a money-saving strategy worth exploring.

 

Learn more:

This article originally appeared on LanternCredit.com and was syndicated by MediaFeed.org.

 

This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice. The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Lantern by SoFi:

This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)

All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.

*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.

Personal Loan:

SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and DisclosuresTerms of Service, and Privacy Policy.

Student Loan Refinance:

SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and DisclosuresTerms of Service, and Privacy Policy.

Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).

Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 01/31/22. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.

Auto Loan Refinance:

Automobile refinancing loan information presented on this Lantern website is from Caribou. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.

Secured Lending Disclosure:

Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.

Life Insurance:

Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC. Click here to view our licenses.



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How to refinance an auto loan

 

In times of lower interest rates, you may start to wonder about whether you should refinance your auto loan. And why not? According to 2020 data from RateGenius, money saved with a new auto loan is at an all-time high. Auto loan refinancing deals saved borrowers $989.72, on average, in 2020.

 

With that much cash up for grabs, it’s no wonder that auto refinancing loans are in big demand. Key strategies for auto owners who want a good refinance loan experience include being prepared and making sure to understand all the details. Read on for information that may help.

 

Related: Soft vs hard credit inquiry: What you need to know

 

phototechno/ istockphoto

 

When you refinance an auto loan, you’re essentially securing a new auto loan. You use the new loan to pay down the balance of the original car loan. That all takes time, effort and money (for loan applications and servicing fees). That’s why you should be sure you have a good reason before you go to the trouble of taking out an auto refinancing loan.

 

So when should you refinance your auto loan? The fact is that vehicle owners refinance their auto loans for a variety of reasons that can all be worthwhile, depending on the situation. Most often, car owners refinance their loans to achieve the following personal financial goals, such as:

  • To Lower Monthly Auto Loan Payments: Getting a new auto loan at a reduced interest rate can cut monthly payments down, leaving more cash in the till for other household expenses.
  • To Get a Lower Interest Rate: Depending on the loan, a car owner may also be able to save money over the lifetime of the loan by getting a reduced interest rate. Take a vehicle for which the original loan was $25,000 and the refinance loan is $21,000. For a 60-month loan where the interest rate is cut from 7% to 5%, for example, the refinancing could save approximately $6,000 over the life of the loan.
  • To Shorten the Loan Term: Car owners who are cash flush may shorten their loan terms to pay off the car faster, thus saving significant cash with lower interest rate payments.
  • To Extend the Loan Term: Car owners who need some financial breathing room after a job loss, an injury or illness, or a divorce or other issue can extend the term of the loan to reduce monthly (but not overall) loan costs.
  • To Get Some Extra Cash: If you have enough equity in your car, you might be able to take out a refinance loan that’s more than what you owe. That way you could get cash in hand, too. This is called a cash out car refinance. But realize that if you opt for this kind of refinancing, you will still have to pay back both the car loan and the extra money.

Also recommended: If you’re new to the world of auto finance, learning some auto loan terminology may help.

 

istockphoto/demaerre

 

Where does a borrower start with the auto loan refinancing process? Ideally, with a good grip on what a refinancing deal has to offer. Auto loan consumers are best off when they fully understand the entire refinancing. It can help to make sure you have answers to these questions:

  • Do you meet the lender’s financial requirements? While each bank or lender has its own rules and regulations on auto refinancing, many banks have similar lending limits. For example, your auto usually must be less than 10 years old and have less than 125,000 miles on it. While the exact figures may vary from lender to lender, know possible vehicle restrictions heading into any refinancing deal.
  • Are there any prepayment penalties? It’s usually a good idea to pay off an auto loan as soon as possible. Doing so clears the debt and puts more money in your pocket. However, some financial institutions may stick you with a prepayment penalty if you pay off the loan early. Be sure to examine your existing loan contract for any prepayment penalties and factor them into your costs.
  • Do you know the total cost? Before green-lighting an auto loan refinancing deal, you need to know the full cost of refinancing the car. Make sure you know how much you’ll save per month and, even more importantly, over the life of the loan. When you refinance, you may be saving money on a monthly basis but adding more dollars to the overall cost of the vehicle. You’ll want to be sure you’re factoring any fees or penalties, too. A good auto loan refi calculator can be highly useful here.
  • What’s your credit score? Most lenders will expect a minimum credit score from potential borrowers. Typically, a FICO credit score of 700 or more will get you the lowest loan rates on an auto refinancing loan. That said, a FICO score of 660 should ensure that you qualify for a standard auto loan refinancing deal.

 

DepositPhotos.com

 

With that prep work complete, now it’s time to figure out the best path to a good auto refinance loan. Get the job done right with these action steps.

 

DepositPhotos.com

 

Start the auto loan refinancing process with some data-gathering. To file a loan application, you’ll typically need these documents:

  • Your original auto loan: Lending institutions will require the original loan paperwork to process a new loan. The original loan paperwork should include the loan amount, the monthly payment, the interest rate, the payoff number and the up-to-date loan balance
  • Your vehicle information: Auto loan providers will also ask for your current vehicle information (think a Carfax for your own vehicle.) This document should include the vehicle’s make, model, year, mileage and vehicle identification number.
  • Your auto insurance paperwork: Make sure you have your car insurance records, including type of insurance and the amount of the insurance included in the policy. Auto lenders won’t make a loan to an uninsured or significantly underinsured vehicle owner. That’s because the lender has a stake in the vehicle as well. If the car is damaged or totaled, your lender will want to know it was properly insured.
  • Your employment records: Your auto loan refinancing lender may also ask for proof of income and employment, to ensure you have the means to repay the loan.

 

ipuwadol

 

Kick off your auto loan refinancing deal by listing what you want from the loan, such as a lower interest rate, no or low fees, a streamlined application process, and solid customer service. Having a candid conversation with your current financial institution is also a good step to take since it may give you an idea of what kinds of loans you could qualify for. And as you look for refinancing loans, remember that you may also want to explore online auto loan refinancing options since they tend to have fewer fees and competitive rates.

 

gpointstudio / istockphoto

 

When you’ve found the loan you want, follow the instructions to apply. A typical auto refinancing loan application likely includes the following:

  • Name
  • Date of birth
  • Email address and phone number
  • Address
  • Social Security number
  • Driver’s license number
  • Work status
  • Your bank’s name, address, routing number and checking account number (so the lender can deposit your loan amount, assuming it is not your bank)
  • Your vehicle information
  • Your auto insurance information

Once you complete the application, review it thoroughly to confirm that the information is accurate and up to date. Any discrepancies or missing information may lead to a loan rejection. And know that the lender will likely perform a credit check.

 

DepositPhotos.com

 

Once your application is approved, your new auto loan provider will pay off your old auto loan or give you the funds to do so, and become your auto loan manager. Future payments will go to the lender who handles your refinanced loan. It is, however, a good idea to confirm with your original lender that the auto loan was paid off and you don’t owe any more payments. After that, be sure you pay the new loan on time and start enjoying the savings from your refinanced auto loan.

 

DepositPhotos.com

 

Whether you simply want to get an auto loan with more favorable terms or you’re looking to adjust your car loan repayment period, refinancing your auto loan allows you to take advantage of lower rates, put more cash in your pocket, and get a loan that meets your unique personal financial needs. Handled correctly, refinanced auto loans can be a big win-win for vehicle owners, who can gain an auto loan with better terms and potentially save money in the process.

 

Learn more:

This article originally appeared on LanternCredit.comand was syndicated by MediaFeed.org.

 

Lantern by SoFi:

This Lantern website is owned by SoFi Lending Corp., a lender licensed by the Department of Financial Protection and Innovation under the California Financing Law, license number 6054612; NMLS number 1121636. (www.nmlsconsumeraccess.org)

All rates, fees, and terms are presented without guarantee and are subject to change pursuant to each provider’s discretion. There is no guarantee you will be approved or qualify for the advertised rates, fees, or terms presented. The actual terms you may receive depends on the things like benefits requested, your credit score, usage, history and other factors.

 

*Check your rate: To check the rates and terms you qualify for, Lantern conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, the lender(s) you choose will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.

 

All loan terms, including interest rate, and Annual Percentage Rate (APR), and monthly payments shown on this website are from lenders and are estimates based upon the limited information you provided and are for information purposes only. Estimated APR includes all applicable fees as required under the Truth in Lending Act. The actual loan terms you receive, including APR, will depend on the lender you select, their underwriting criteria, and your personal financial factors. The loan terms and rates presented are provided by the lenders and not by SoFi Lending Corp. or Lantern. Please review each lender’s Terms and Conditions for additional details.

 

Personal Loan:

SoFi Lending Corp. (“SoFi”) operates this Personal Loan product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lenders/partners receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. 

 

More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and DisclosuresTerms of Service, and Privacy Policy.

 

Student Loan Refinance:

SoFi Lending Corp. (“SoFi”) operates this Student Loan Refinance product in cooperation with Even Financial Corp. (“Even”). If you submit a loan inquiry, SoFi will deliver your information to Even, and Even will deliver to its network of lenders/partners to review to determine if you are eligible for pre-qualified or pre-approved offers. The lender’s receiving your information will also obtain your credit information from a credit reporting agency. If you meet one or more lender’s and/or partner’s conditions for eligibility, pre-qualified and pre-approved offers from one or more lenders/partners will be presented to you here on the Lantern website. 

 

More information about Even, the process, and its lenders/partners is described on the loan inquiry form you will reach by visiting our Personal Loans page as well as our Student Loan Refinance page. Click to learn more about Even’s Licenses and DisclosuresTerms of Service, and Privacy Policy.

 

Student loan refinance loans offered through Lantern are private loans and do not have the debt forgiveness or repayment options that the federal loan program offers, or that may become available, including Income Based Repayment or Income Contingent Repayment or Pay as you Earn (PAYE).

 

Notice: Recent legislative changes have suspended all federal student loan payments and waived interest charges on federally held loans until 09/30/21. Please carefully consider these changes before refinancing federally held loans, as in doing so you will no longer qualify for these changes or other future benefits applicable to federally held loans.

 

Auto Loan Refinance:

Automobile refinancing loan information presented on this Lantern website is from MotoRefi. Auto loan refinance information presented on this Lantern site is indicative and subject to you fulfilling the lender’s requirements, including: you must meet the lender’s credit standards, the loan amount must be at least $10,000, and the vehicle is no more than 10 years old with odometer reading of no more than 125,000 miles. Loan rates and terms as presented on this Lantern site are subject to change when you reach the lender and may depend on your creditworthiness. Additional terms and conditions may apply and all terms may vary by your state of residence.

 

Secured Lending Disclosure:

Terms, conditions, state restrictions, and minimum loan amounts apply. Before you apply for a secured loan, we encourage you to carefully consider whether this loan type is the right choice for you. If you can’t make your payments on a secured personal loan, you could end up losing the assets you provided for collateral. Not all applicants will qualify for larger loan amounts or most favorable loan terms. Loan approval and actual loan terms depend on the ability to meet underwriting requirements (including, but not limited to, a responsible credit history, sufficient income after monthly expenses, and availability of collateral) that will vary by lender.

 

Life Insurance:

Information about insurance is provided on Lantern by SoFi Life Insurance Agency, LLC.

 

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