||Ask Dr. Don
Auto loan interest deductions?
Dear Dr. Don,
Is the interest paid on an automobile
loan tax-deductible? Also, how do I find out about prepayment penalties
on said loan?
Interest paid on consumer debt other than mortgage debt
hasn't been deductible since the Tax Reform Act of 1986. That's
why some consumers use home equity lines of credit or home equity
loans to finance car purchases. It's also a reason why automakers'
zero-percent loan promotions are so popular with consumers.
If your loan has a prepayment penalty, that penalty
will be spelled out in the loan documents. If you can't find your
loan documents or you can't find anything in the paperwork that
speaks to a prepayment penalty, then call the lender and ask them.
Sometimes the interest expense on auto loans is computed
using the Rule of 78s. This approach front-loads the interest expense,
so paying off your loan early results in an implied prepayment penalty.
This approach isn't used very often anymore except by lenders in
the subprime market.
feature explains the Rule of 78s and its de facto prepayment
penalty. Again, if your loan document doesn't address how interest
is computed you can discuss this issue with your lender.
-- Posted: Sept. 23, 2002