Is Personal Loan Interest Tax Deductible? | Capital One (2024)

January 24, 2023 |5 min read

    A personal loan can be used to consolidate debt, spruce up a home, cover unexpected medical bills or fund other big purchases. Generally, the size of a personal loan might stretch from hundreds to thousands of dollars with interest rates ranging from 10% to 28%, according to the Chamber of Commerce.

    When it’s time to file your federal tax return, you usually can’t take a tax deduction for the interest paid on a personal loan during the most recent tax year. However, there are some exceptions. Learn more about what types of personal loan interest could be eligible for a tax write-off.

    Key takeaways

    • A personal loan’s interest rate might vary based on factors like the loan applicant’s credit score.
    • The amount paid in interest can be calculated using the loan amount, interest rate and payoff period.
    • Interest paid on a personal loan typically isn’t tax deductible.
    • If money from a personal loan goes toward certain business, college or investment expenses, the interest payments could be tax deductible.

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    An overview of personal loan interest

    The interest rate for a personal loan is the price to borrow money. The rate depends on several factors—like the loan applicant’s credit score, income, debt-to-income ratio, amount of money they’re borrowing and length of the payoff period.

    A free loan calculator can help a borrower understand how much they’ll have to pay monthly in interest for a loan.

    For instance, a five-year $10,000 personal loan with an 8% interest rate might result in an estimated monthly payment of $203—for a total of $2,166 in interest paid during the loan period. But a $10,000 personal loan with a three-year payoff period and a 10% interest rate could result in an estimated monthly payment of $323 but only $1,616 in total interest.

    Average personal loan interest rate

    According to the Federal Reserve, the average interest rate for a two-year personal loan is 10.16%. But it’s worth noting that a personal loan’s interest rate can be impacted by the borrower’s credit score. A higher score may lead to a lower interest rate, while a lower score may lead to a higher interest rate or denial of an application.

    Personal loans generally come with a fixed interest rate and fixed payoff period. Below are four personal loan scenarios.

    Loan amount Interest rate Payoff period (years) Estimated monthly payment Total interest paid
    $2,500 12% 2 $118 $324
    $5,000 25% 3 $199 $2,157
    $10,000 30% 4 $360 $7,283
    $25,000 33% 5 $856 $26,330

    What happens if the borrower ends up with extra cash and wants to pay off a personal loan early? Sure, they could save money on interest. But it’s also worth considering how paying off a personal loan early may affect credit.

    When can interest on a personal loan be deducted from taxable income?

    While the IRS offers tax deductions for interest on debt like student loans and mortgages, personal loans typically don’t fall into the same bucket. However, interest paid on a personal loan can be deducted from taxable income when the loan funds things like:

    • Business expenses
    • Education expenses
    • Qualified investments

    Business expenses

    Whether the borrower is a small-business owner or has their own side gig, they might have to spend money to earn money. And according to the IRS, “You can generally deduct as a business expense some or all interest you pay or accrue during the tax year on debts related to your business.” In this case, if a personal loan is used to cover business costs, the interest might be eligible for a tax deduction. Qualifying business expenses may include:

    • Transportation and vehicle costs
    • Office rent and equipment
    • Supplies and machinery
    • Advertising

    If interest payments do qualify as a business expense, the interest amount would be subtracted from the business income on a federal tax return. As a result, the borrower’s tax liability might decrease for the tax year when the interest was paid.

    Keep in mind that if the proceeds of a personal loan are put toward both business and personal expenses, only the percentage of interest tied to the business expenses can be written off.

    Education expenses

    If all the money from a personal loan goes toward qualified education expenses for higher education, the IRS may view it as a student loan. Educational expenses may include:

    • Tuition
    • Fees
    • Room and board
    • Textbooks
    • Supplies and equipment
    • Transportation

    The maximum annual deduction for student loan interest is $2,500. The student must be the taxpayer, their spouse or their dependent and enrolled at least part time. To receive the deduction, a single filer’s modified adjusted gross income (MAGI) must be $85,000 or less. If married and filing jointly, MAGI must be $170,000 or less. The deduction isn’t available if the student and their spouse file tax returns separately instead of jointly.

    Keep in mind that many lenders won’t allow the proceeds of a personal loan to cover education expenses. And most personal loans come with higher interest rates than federal student loans do.

    Qualified investments

    If money from a personal loan is used for certain investments, interest paid on the loan might be eligible for a deduction. The deduction can be taken only for taxable investments, including some:

    • Stocks
    • Bonds
    • Mutual funds

    The borrower can’t take an interest deduction related to investments that provide tax advantages, such as tax-exempt bonds. And an interest deduction can only be claimed for the percentage of a personal loan that went toward a qualified investment. And there’s another wrinkle—in order to claim this type of deduction, deductions must be itemized on the tax return.

    Is interest paid on other debts tax deductible?

    Other types of loans might be more likely to offer tax deductions for interest payments. These debt categories include:

    • Traditional student loans
    • Business loans
    • Qualified mortgages
    • Home equity loans and home equity lines of credit

    Deducting personal loan interest in a nutshell

    Before taking out a personal loan, it might be helpful to consider whether you can write off the interest paid on that loan. In most cases, personal loan interest doesn’t qualify for a tax write-off. But if the money borrowed goes toward certain business, college and investment expenses, you may qualify for a tax deduction tied to the interest payments.

    When it comes to understanding how to file your taxes, it may help to speak to a tax adviser. You can also learn about what taxes are and tax credits you may be eligible for.

    Is Personal Loan Interest Tax Deductible? | Capital One (2024)

    FAQs

    Is Personal Loan Interest Tax Deductible? | Capital One? ›

    The amount paid in interest can be calculated using the loan amount, interest rate and payoff period. Interest paid on a personal loan typically isn't tax deductible. If money from a personal loan goes toward certain business, college or investment expenses, the interest payments could be tax deductible.

    Can you deduct interest on a personal loan on taxes? ›

    Is interest on a personal loan tax deductible? In most cases, you cannot get a tax deductible interest on personal loans. You may not deduct interest expenses from an unsecured personal loan unless the loan is for business expenses, qualified education expenses, or eligible taxable investments.

    How much loan interest is tax-deductible? ›

    How much interest can I write off? You can deduct the interest you paid on the first $750,000 of your mortgage during the relevant tax year. For married couples filing separately, that limit is $375,000, according to the Internal Revenue Service.

    How do I report interest paid on a personal loan? ›

    Taxable interest is taxed just like ordinary income. Payors must file Form 1099-INT and send a copy to the recipient by January 31 each year. Interest income must be documented on Schedule B of IRS Form 1040.

    Can I write off a bad personal loan on my taxes? ›

    Generally, you can't take a deduction for a bad debt from your regular income, at least not right away. It's a short-term capital loss, so you must first deduct it from any short-term capital gains you have before deducting it from long-term capital gains.

    Does a personal loan count as taxable income? ›

    Personal loans can be made by a bank, an employer, or through peer-to-peer lending networks, and because they must be repaid, they are not taxable income. If a personal loan is forgiven, however, it becomes taxable as cancellation of debt (COD) income, and a borrower will receive a 1099-C tax form for filing.

    How to write off unsecured loans? ›

    Which debt solutions write off debts?
    1. Bankruptcy: Writes off unsecured debts if you cannot repay them. Any assets like a house or car may be sold.
    2. Debt relief order (DRO): Writes off debts if you have a relatively low level of debt. Must also have few assets.
    3. Individual voluntary arrangement (IVA): A formal agreement.

    Which of the following types of interest is not deductible? ›

    Types of interest not deductible include personal interest, such as: Interest paid on a loan to purchase a car for personal use. Credit card and installment interest incurred for personal expenses.

    Why can't I claim my mortgage interest on my taxes? ›

    The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Otherwise, it is considered personal interest and isn't deductible.

    What can I itemize on my taxes? ›

    If you itemize, you can deduct these expenses:
    • Bad debts.
    • Canceled debt on home.
    • Capital losses.
    • Donations to charity.
    • Gains from sale of your home.
    • Gambling losses.
    • Home mortgage interest.
    • Income, sales, real estate and personal property taxes.

    Can a personal loan be written off? ›

    In most cases, personal loan interest doesn't qualify for a tax write-off. But if the money borrowed goes toward certain business, college and investment expenses, you may qualify for a tax deduction tied to the interest payments.

    What if I have more than $1500 in taxable interest income? ›

    Schedule B is an IRS tax form that must be completed if a taxpayer receives interest income and/or ordinary dividends over the course of the year of more than $1,500. The schedule must accompany a taxpayer's Form 1040. Taxpayers use information from Forms 1099-INT and 1099-DIV to complete Schedule B.

    Can I write off credit card interest? ›

    Key takeaways. Credit card interest is not tax-deductible for personal expenses. The government stopped allowing a tax deduction for credit card interest in the 1980s. Interest on student loans, mortgages, home equity loans, and business expenses are still tax-deductible.

    What type of loan is not tax deductible? ›

    Key Takeaways

    Interest paid on personal loans, car loans, and credit cards is generally not tax-deductible. However, you may be able to claim interest you've paid when you file your taxes if you take out a loan or accrue credit card charges to finance business expenses.

    How to write-off a loan? ›

    Loan write-off refers to the situation when the lender has moved a particular loan's pending dues out of the “Assets” column and has reported this amount as a loss. This happens after the borrower has defaulted on the loan repayment, and there is a low chance of recovery.

    Can I deduct interest on a loan from a family member? ›

    This is a personal family loan. Interest paid on a personal loan is not deductible on a tax return.

    Which of the following types of interest expenses is not deductible? ›

    Not all types of interest are deductible. Specifically, the IRS does not allow you to deduct personal interest such as: The interest you pay on a loan to buy a car for personal use. Credit card and installment loan interest on personal expenses.

    Can you write off a line of credit interest? ›

    When Is Interest On A HELOC Tax Deductible? According to the IRS, interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan.

    Can I write off a loan to a family member? ›

    You can take a tax deduction for a nonbusiness bad debt if: The money you gave your nephew was intended as a loan, not a gift. You must have actually loaned cash to your nephew. The entire debt is uncollectible.

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