What Lenders and Borrowers Need to Know About New 2025 Auto Loan Interest Reporting

Changes introduced under the One Big Beautiful Bill Act have created both new opportunities and new compliance responsibilities related to personal auto loan interest. For the first time in years, certain personal auto loan interest will again be deductible, and financial institutions will face new information-reporting requirements to support that deduction. Understanding how these rules apply to both borrowers and lenders will be essential as organizations prepare for the 2025 filing season and beyond.

For tax years 2025 through 2028, individuals may deduct up to $10,000 of interest paid on qualified personal auto loans, regardless of whether they itemize deductions. To support this benefit, lenders must begin providing new reporting information using IRS Form 1098-VLI, Vehicle Loan Interest Statement, for borrowers who meet the reporting thresholds. While the IRS has provided transitional relief for 2025, the new framework represents a meaningful shift in how vehicle loan interest is documented and reported.

Deductible Personal Auto Loan Interest

Under the new rules, interest paid on qualifying personal auto loans is deductible for new vehicles—those with no prior owners or title transfers—purchased and placed in service between 2025 and 2028. The deduction is available to both itemizers and non-itemizers, which significantly broadens its applicability compared to prior law. However, not all vehicles or loans qualify.

To be eligible, the vehicle must have a gross vehicle weight of less than 14,000 pounds, be finally assembled in the United States, and be purchased for personal use. In addition, the loan must be secured by a first lien on the vehicle. These requirements are designed to limit the deduction to passenger vehicles and to ensure a clear link between the loan and the asset.

For borrowers, this change may reduce taxable income and improve after-tax affordability of new vehicle purchases. For lenders, it introduces a new responsibility to track and report detailed loan and vehicle information to support borrower deductions.

IRS Form 1098-VLI and Reporting Requirements

To substantiate the deduction, lenders must provide IRS Form 1098-VLI to individual borrowers who pay more than $600 in interest on a qualified passenger vehicle loan during the calendar year. This new form expands traditional interest reporting and includes both loan-level and vehicle-specific details.

The information reported includes the borrower’s name and address, the total interest received during the year, and the outstanding principal balance as of January 1 of the calendar year. In addition, lenders must report the loan origination date, the loan acquisition date if applicable, and specific vehicle information, including the year, make, model, and Vehicle Identification Number (VIN). The form also includes a field to report any refund of overpaid interest. Collectively, these data points allow the IRS to verify eligibility for the deduction and ensure consistency between lender reporting and borrower tax filings.

From an operational perspective, these requirements may necessitate updates to loan servicing systems, data capture processes, and reporting workflows, particularly for institutions that have not historically tracked vehicle-level data beyond origination.

Transitional Rules for the 2025 Tax Year

Because the legislation was enacted midyear, the IRS has provided transitional relief for the 2025 tax year to give lenders time to implement the new reporting framework. IRS Notice 2025-57 treats 2025 as a transition year and offers flexibility in how lenders satisfy their reporting obligations.

For interest received in 2025, lenders are considered compliant if they make a statement available to the borrower by January 31, 2026, showing the total amount of interest received during the year on a qualified passenger vehicle loan. This statement does not need to be issued on Form 1098-VLI for 2025, provided the required information is communicated clearly.

Acceptable delivery methods include an online portal the borrower can easily access, a regular monthly statement, an annual statement, or a similar format. This flexibility allows financial institutions to bridge the gap while systems and processes are updated for full Form 1098-VLI reporting in subsequent years.

Considerations for Financial Institutions

Although transitional relief is available for 2025, financial institutions should view this year as a preparation period rather than a pause. Beginning with 2026 reporting, full compliance with Form 1098-VLI requirements will be expected.

Institutions may need to evaluate whether current loan servicing platforms capture all required data elements, including VINs and vehicle characteristics, and whether reporting processes can support timely and accurate statements. Training staff, updating procedures, and coordinating between lending, servicing, and tax reporting teams will be important steps in reducing compliance risk and avoiding downstream issues for borrowers.

Guidance for Borrowers

Borrowers who purchase qualifying vehicles and pay interest on eligible loans should retain any interest statements issued by their lender and consult their tax advisor to determine how the deduction applies to their individual situation. Understanding the vehicle eligibility rules and the applicable dollar limits can help ensure deductions are claimed accurately and supported by proper documentation.

The amount reported on Form 1098-VLI may not be fully deductible, depending on individual tax circumstances and statutory limitations. Specifically, the auto loan interest deduction begins to phase out at Modified Adjusted Gross Income (MAGI) levels starting at $100,000 for singles and $200,000 for joint filers, with the deduction reduced by $200 for every $1,000 over the threshold, ending entirely at $150,000 (single) and $250,000 (joint) MAGI. Because this deduction is available to both itemizers and non-itemizers, it may affect broader tax planning decisions, including withholding, estimated payments, and year-end strategies.

Preparing for Compliance and Planning Opportunities

The return of deductible personal auto loan interest creates a meaningful planning opportunity for borrowers while introducing new compliance obligations for lenders. Navigating these changes will require coordination, clear communication, and careful attention to reporting requirements, particularly as the transition year gives way to full implementation.

If you have questions about IRS Form 1098-VLI reporting, transitional rules for 2025, or how the new auto loan interest deduction may affect your organization or your customers, contact your CRI advisor. Proactive planning now can help ensure compliance while positioning both lenders and borrowers to take full advantage of the new rules.