In most cases, the interest you pay on a personal loan is not tax-deductible. If you take out a personal loan to cover everyday personal expenses—like buying a car for personal use, paying medical bills, or financing a vacation—you cannot use the interest payments to reduce your tax bill.
The same rule applies to credit card interest. In general, interest paid on credit card balances is also not tax-deductible. According to the Internal Revenue Service (IRS), the money you borrow through a personal loan is not treated as income, so it is not taxed.
However, if part or all of your debt is forgiven, that forgiven amount may be considered taxable income under what’s called cancellation of debt (COD) income.
Types of Debt Expenses That Are Tax-Deductible
While personal loan interest is not deductible, there are certain types of loans where the interest can reduce your taxable income. These include:
- Mortgage Loans
- Student Loans
- Business Loans
When specific requirements are met, interest paid on these types of loans can be subtracted from your income on your tax return, which lowers the total amount of income that you owe taxes on.
For example, mortgage interest is deductible, but only if the loan was used to buy or improve your primary home. In some cases, if you’ve received a mortgage credit certificate through a government-backed program—often available to lower-income homebuyers—you may also qualify for a tax credit. A tax credit directly reduces the amount of tax you owe, rather than simply lowering your taxable income.
If you’re thinking of getting a personal loan, it’s important to avoid relying on tax deductions as a way to make it more affordable. Instead, use a personal loan calculator to see what your monthly payments might look like and make sure the loan fits your budget.
Exceptions to the Rule
Although most personal loans do not offer tax benefits, there are exceptions—especially when the borrowed funds are used for business-related purposes.
If you use a personal loan or a credit card to finance business expenses (even if mixed with personal expenses), you may be allowed to deduct the interest that is directly tied to the business part of the spending. However, you must:
- Be legally responsible for repaying the loan
- Be able to clearly identify and separate the business-related portion of the interest
Example: Business Vehicle Loan
If you use a personal loan to buy a car that is used for business purposes, you might qualify for a tax deduction on the loan’s interest:
- If the car is used only for business, then 100% of the interest is deductible
- If the car is used partially for personal use, only the business-use portion of the interest is deductible
Let’s say you use your car 60% of the time for business. In that case, 60% of the loan’s interest for the year could potentially be claimed as a tax deduction.
This exception also applies if you use a personal loan to invest in a small business entity, such as an S corporation, partnership, or LLC. The key is that the loan should be used for purposes tied directly to the business.
Student Loan Interest
One of the most well-known tax-deductible loan types is the student loan. If you’re repaying a qualified student loan, you may be able to deduct the interest you paid, including origination fees and any capitalized interest.
This tax deduction can lower your taxable income by up to $2,500 per year—as long as your income is within certain limits. The deduction is considered an “adjustment to income”, which means you can claim it even if you don’t itemize deductions (i.e., even if you take the standard deduction).
To qualify, the loan must be used to pay for approved higher education expenses at an eligible school. These expenses can include tuition, fees, books, supplies, and any other costs required by the school. The IRS provides a full list of qualified expenses and institutions.
How Do People Use Personal Loans?
To better understand how Americans use personal loans, Investopedia conducted a nationwide survey between August 14 and September 15, 2023. The survey included 962 U.S. adults who had taken out a personal loan.
According to the findings:
- Debt consolidation was the top reason people borrowed money
- Home improvement was the second most common reason
- Other major uses included covering large, unexpected expenses
These results highlight how personal loans are often used to manage or restructure debt, or to fund important purchases that might be difficult to afford upfront.
Can I Deduct Student Loan Interest If the Loan Is in My Child’s Name?
Yes—but only if your child is still a dependent on your tax return. A dependent can be your qualifying child or relative, as long as no one else can claim them on their tax return.
Is Credit Card Interest Tax-Deductible?
Unfortunately, credit card interest is never tax-deductible, even if you use the credit card for personal or everyday expenses. This includes purchases made for travel, shopping, or even emergency spending.
The Bottom Line
Personal loans are a flexible way to borrow money for many different needs—whether it’s consolidating debt, renovating your home, or handling an emergency. But it’s important to know that they don’t usually offer tax benefits unless the funds are used for qualified business expenses.
If your main goal is to pay for higher education, you might want to explore student loan options, which often come with tax deductions and other borrower-friendly benefits.
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