Auto Loan Deductibility Plan Sparks Suspicion Among Subprime Lenders

Subprime lenders say they are wary of a GOP proposal that would allow borrowers to deduct up to $10,000 in auto loan interest.

While supporters say the proposal — part of the so-called “One Big Beautiful Bill,” which was passed by the House in late May — might encourage Americans to buy American, critics argue that the policy offers sparse benefits to subprime borrowers at the greatest risk of delinquency.

The proposed tax break would apply only to vehicles assembled in the United States and would begin phasing out at $100,000 in income for single filers and $200,000 for joint filers. The benefit is temporary, lasting only from tax year 2025 to 2028.

Subprime lenders say they have several reasons to be dubious about the proposed deduction. Delinquencies in subprime loans are at or near record levels (60-plus-day rates topping 6.5%) in data monitored by S&P Global.

Even some prime borrowers began to fall behind on payments. With all this, lenders may question whether a yearly tax break for some higher-end earners actually addresses real affordability concerns.

The National Taxpayers Union Foundation (NTUF) contends that the deduction is an ill-considered response to a great crisis.

AAA reported that the average driver paid $1,332 of annual loan interest charges on new cars bought in 2024.

Since the deduction provides the largest tax benefits to those having higher adjusted gross incomes and itemized deductions, the policy essentially excludes those low-income consumers who prevail in the subprime auto sector.

And because it is designed as a tax-time rebate, it fails to alleviate much pressure on monthly payments that cause most delinquencies.

Others worry that relying on a tax deduction comes at the expense of smarter lending strategies. Subprime lenders already contend with expensive vehicles, steep rates, and limited capital markets, which compound affordability concerns and growing delinquency.

Instead of a proposed industrywide tax credit that favors a minority of borrowers, lenders could do more by considering revamping underwriting criteria, widening hardship programs, or granting flexible repayment terms.

These instruments address borrower suffering more directly and may minimize risk exposure in lender portfolios.

As the National Taxpayers Union Foundation writes, depending on symbolic tax relief rather than structural reform may pose reputational risk for lenders, particularly if borrowers do not see better cash flow at the end of every month.

“It would likely exacerbate the problem of rising loan delinquency rates by exerting further demand pressure on the auto loan market.” What’s more, if the deduction is promoted as a solution but doesn’t help subprime borrowers, lenders may face political or public backlash. 

Other long-term competitive implications could also arise. If the industry moves toward policies that disproportionately favor those at higher incomes, subprime lenders could be left behind fintech lenders and community lenders that prioritize borrower-level financial health.

In contrast, those lenders that adopt proactive servicing, customer education, and intelligent underwriting may be in a better position to accommodate the changing requirements of the subprime sector. That, in turn, could minimize losses, enhance retention, and foster sustainable growth.

The auto loan deduction still faces hurdles in the Senate. Congressional leaders are arguing other contentious parts of the bill, including those that touch on the debt ceiling and entitlement reductions. Although auto loan deduction is dear to President Trump, there are no assurances it will remain part of the final bill.

It’s even possible that the subprime lenders’ bigger challenge is one of focus. Rising delinquency rates and affordability challenges demand real solutions. Regardless of whether the deduction becomes law, lenders may look to tools and practices that actually support borrower success.