Americans are staying in car debt longer as Trump’s new interest deduction leaves used cars out

Car debt can follow drivers for years

On September 30, 2026, CNBC Make It reported on Americans remaining in car debt across multiple vehicle purchases. Longer loans can leave borrowers owing money when they want another vehicle.

Trading an underwater vehicle can move unpaid debt into the next loan. Iowa State University professor Charles Chaffin called the situation an “element of permanent car debt.”

Drivers who trade before paying down enough principal can carry old debt into their next vehicle loan.

One Ram shows how debt can linger

A 2025 Ram 3500 illustrated the issue at Always Auto in Wichita Falls, Texas. The truck had 14,000 miles when its owner sought a vehicle with a lower payment. The customer was paying $1,472 monthly and owed about $79,000.

Dealer owner Josh Letsis estimated the Ram was worth roughly $58,000, leaving approximately $21,000 in negative equity. The customer had no cash for a down payment. Letsis advised him to keep the Ram.

Dealers encounter underwater buyers

Letsis said the Ram customer’s situation was not unusual at his Texas dealership. He told CNBC that similar conversations occur “2 or 3 times a day.”

Five years earlier, Letsis associated a $20,000 negative equity balance mainly with an expensive Mercedes rather than a pickup. He said Ford trucks can now carry similar negative equity balances.

Negative equity reaches more trade-ins

Edmunds reported on July 16, 2026, that 29.6% of trade-ins toward new-vehicle purchases carried negative equity during the second quarter. The average shortfall was $6,884, the highest second-quarter amount in Edmunds’ records.

Underwater vehicles were, on average, 4 years old when traded. Edmunds linked their age to purchases around 2022, when inventory was limited and incentives were scarce.

Seven year financing reaches a record

Edmunds found that 23.9% of financed new-vehicle purchases in the second quarter of 2026 had loan terms of 84 months or longer, setting a record.

Another 36.5% used terms of at least 73 months. A decade earlier, that share was 27.3%. Longer repayment periods can leave borrowers owing more when they trade before paying down enough principal.

Rolling debt raises borrowing costs

Edmunds found that buyers financing new vehicles with underwater trade-ins had an average monthly payment of $944 during the second quarter of 2026. Projected interest over the life of those loans averaged $16,270.

More than 40% of buyers carrying negative equity selected 84-month financing. Rolling negative equity into another loan increases the amount financed on the replacement vehicle.

Trump law created the tax break

President Donald Trump signed the One Big Beautiful Bill Act into law on July 4, 2025. The law created a federal deduction for interest on qualified passenger vehicle loans.

Taxpayers can deduct up to $10,000 of qualifying interest annually. The vehicle’s original use must begin with the taxpayer, excluding ordinary used-vehicle purchases.

Final assembly must occur in the United States. The deduction applies to qualifying loans incurred after December 31, 2024.

Rolled debt receives different treatment

The final regulations address negative equity carried over from a trade-in. That amount is not treated as debt incurred to purchase the qualifying replacement vehicle.

Interest must be allocated when financing includes qualifying and nonqualifying amounts. Directly related expenses, such as service plans and extended warranties, can qualify.

Interest tied to negative equity from the previous vehicle remains outside the deduction.

Personal use determines eligibility

At purchase, a taxpayer must expect the qualifying vehicle to be used for personal purposes for more than 50% of the expected ownership period. The qualifying debt must be secured by a first lien on the vehicle.

Lease financing is excluded from qualified passenger vehicle loan interest. Taxpayers claiming the deduction must provide the vehicle identification number on their return.

Income can reduce the deduction

The phaseout starts when the modified adjusted gross income exceeds $100,000 for individual taxpayers. For married couples filing jointly, the threshold is $200,000.

The deduction falls by $200 for every $1,000, or portion of $1,000, above the applicable threshold. The $10,000 maximum applies per tax return. Taxpayers can claim the deduction without itemizing their federal deductions.

The deduction has a limited lifespan

Federal law makes interest on qualified passenger vehicle loans deductible for tax years beginning after December 31, 2024, and before January 1, 2029.

Interest on refinanced debt can remain eligible when the replacement financing is secured by a first lien on the same qualifying vehicle.

The eligible refinanced amount cannot exceed the outstanding balance immediately before refinancing.

Lenders face new reporting duties

Federal law establishes reporting responsibilities for businesses receiving interest on specified passenger vehicle loans.

Reporting applies when the statutory interest threshold is reached. The recipient must provide information to the IRS and furnish a statement to the payor of record.

Final regulations establish requirements for those reports. The statement must warn that the full amount of reported interest may not be deductible.

Chase CEO warns of rising auto-loan risks as repossessions surge, highlighting the financial strain facing some borrowers as vehicle debt and repayment pressures increase.

Millions of loans meet two key tests

Treasury and the IRS estimated that roughly 6 million loans originated on new U.S.-assembled vehicles during 2024. About 16 million new light vehicles were sold that year.

Treasury estimated roughly 60% of new vehicle purchases involved loans, and about 60% of vehicles sold underwent U.S. final assembly. Those figures produced the rounded estimate of 6 million loans.

U.S. auto loan borrowing hits a record $211 billion as Americans keep buying cars, underscoring how widespread vehicle financing has become.

Would you buy used if only new car loans qualified for the interest deduction? Share your views in the comments.

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This slideshow was made with AI assistance and human editing.