• Tax

Are Personal Loans Tax Deductible? What You Need to Know

By Sam Swenson | Updated March 24, 2022
reading time 2 min read
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Key takeaways

  • Personal loans are not tax deductible.
  • However, there are certain instances in which there are tax implications around personal loans, like if a  lender forgives all or part of a debt.
  • If you know you will owe taxes and don’t have the cash on hand to pay your balance due, a personal loan may come in handy.

It’s a good idea to understand how a personal loan may impact your taxes, especially since you don’t want to end up liable for unexpected penalties. 

This article outlines basic information for personal loans as it applies to your taxes but should not be considered professional tax advice.

Is personal loan interest tax deductible?

The simple answer is no— personal loan interest is not tax deductible.

Personal loans won’t be a factor when it comes time to file your tax return because the proceeds are not considered income.

A personal loan is a debt that you need to repay in full, and as long as you have a plan to continue paying it off, you won’t need to worry about any impact to your tax return. 

Personal loans are sometimes known as debt consolidation loans, installment loans, or signature loans. In all cases, you’ll need to pay back the loan plus interest over a specified period of time.

However, in certain cases, tax implications may arise. This most commonly occurs when all or a portion of the personal loan is forgiven or canceled. The amount forgiven is included on form 1099-C, which is then included with your annual tax filing and taxed as ordinary income. 

When personal loan interest may be tax-deductible

As mentioned above, the interest you pay on a personal loan is generally not tax deductible. Unlike a mortgage loan, you can’t deduct the interest you pay for a personal loan unless you use the funds for a specific reason.

Here are a few circumstances that allow for some tax deductibility:

  • Using your loan for business expenses: Personal loan interest may be deductible against business income if you use your loan proceeds to pay for certain business expenses. Business expenses must be “ordinary and necessary”, and must also contribute to ongoing business operations. Recall that only the interest is deductible, not the loan proceeds, and that it is deductible against business income —not personal income. 

Some lenders may not allow you to take out a personal loan to pay for specific business expenses, so make sure to check with your lender first if you’re thinking about using a personal loan for this reason. 

Personal loan to pay taxes

If you know you will owe taxes and don’t have the cash on hand to pay, a personal loan may come in handy. The interest on a personal loan is generally lower than that on a credit card, so it may be a less expensive option to pay off any outstanding tax liability if you don’t have the cash.

Stay prepared for taxes throughout the year

Generally speaking, having a personal loan likely won’t affect your taxes. However, if at any point during the year you’ve had a personal loan forgiven—or if you’ve used any personal loan proceeds to pay for business expenses – you might have some tax implications to consider. 

Preparing for your annual tax filing can be time consuming, so being especially mindful to make this a year-round process can help. Make it a point to keep accurate and organized records, especially if you freelance or have your own business. 

Luckily, personal loans don’t usually play a large part in tax planning.

This content is general in nature and is provided for informational purposes only. Upstart is not a financial advisor and does not offer financial planning services. This content may contain references to products and services offered through Upstart’s credit marketplace.

About the Author

Sam Swenson

Sam is a fee-only financial planner, CPA, and freelance writer. After nearly a decade in various Wall Street roles, Sam found a niche in creating objective, accessible, and actionable financial plans for everyday people. Sam has also published long- and short-form personal finance and investment planning content on various websites across the internet. Outside of work, Sam enjoys running, biking, reading, and philosophy, as well as spending time with his wife, daughter, and goldendoodle.

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