Are Personal Loans Tax Deductible?
Money borrowed through a loan is not income, and therefore not taxable or tax deductible. So, for the most part, the interest paid on personal loans is not tax deductible. However, there are certain scenarios that allow for personal loan interest to be deducted on your taxes (e.g., business expenses, taxable investments, etc.).
At Credit Union of Southern California (CU SoCal), we make getting a personal loan easier.
Call 866.287.6225 today to schedule a no-obligation consultation and learn about our home equity lines of credit, auto loans, personal loans, checking and savings accounts, and other banking products. As a full-service financial institution, we look forward to helping you with all of your banking needs.
Are personal loans tax deductible? Read on to learn more!
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Do Personal Loans Count As Taxable Income?
Because a personal loan is not earned income it will not have an effect on your taxes. However, there are two scenarios in which personal loans could be considered taxable income:
Cancellation Of Debt (COD).
According to the IRS, in general, if you have cancellation of debt income because your debt is canceled, forgiven, or discharged for less than the amount you must pay, the amount of the canceled debt
is taxable and you must report the canceled debt on your tax return for the year the cancellation occurs. The canceled debt isn't taxable, however, if the law specifically allows you to exclude it from gross income, through one of several
exceptions.
Gift By A Private Lender. If a loan from a private lender (relative or friend) is forgiven as a gift is not considered income, and is therefore not taxed.
When Are Personal Loans Tax Deductible?
Not only are personal loans a great tool for improving your financial position, in some cases, the interest paid on the loan amount is tax deductible.
By definition, a personal loan is for one’s personal use, so any part of the loan that’s used for personal expenditures is not tax deductible. This would include: taking a vacation, buying furniture, paying for a wedding, making home improvements, and debt consolidation.
When it comes to personal versus business expenses, the
IRS makes the following distinction: generally, you cannot deduct personal, living, or family expenses. However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. You can deduct the business part.
For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you can deduct 70% of the interest as a business expense. The remaining 30% is personal interest and is not deductible. Refer to chapter 4 of
Publication 535, Business Expenses, for information on deducting interest and the allocation rules.
Business Expenses
The IRS defines business expenses as the cost of carrying on a trade or business. These expenses are usually deductible if the business operates for-profit. This means some business-related costs like travel, rent and office equipment could qualify for a deduction. The interest on a personal loan used to purchase or repair a vehicle used exclusively for business purposes may be deductible as well.
Qualified Higher Education Expenses
A Personal loan to pay for college or university education can qualify for a deduction of the loan interest, if the loan is use solely for qualifying education-related expenses.
Taxable Investments
The interest paid on a personal loan may be tax-deductible if it is used to purchase certain taxable investments, including stocks, bonds and mutual funds.
Personal Loan Income Tax Exemption
A personal loan can be a very useful resource to help you invest in your future and improve your financial situation. However, its not recommended that a personal loan be taken out specifically for any tax benefit. Tax laws are complex and change from year-to-year. Speak with a tax professional if you have specific questions on whether personal loan interest is tax-exempt for your specific business expense, education expense or investment purchase.
Are Personal Loans A Good Idea?
Personal loans help with home renovations, paying for college tuition, and even consolidating high-interest debt from credit cards and student loans. Depending on how you use the money, you may qualify for a personal loan interest deduction.
There are several types of personal loans, including secured (using an item of value to secure the loan) and unsecured (no security/collateral required for approval). However, all personal loans are designed to help people achieve the same goal, and that is borrowing money. Each type of personal loan has unique terms and conditions that will vary by lender.
Before taking out a personal loan, decide how much money you need, how much time you may need to pay back it, and how much you can afford in monthly payments toward loan repayment. Having a solid idea of how you’ll use and repay the money you borrow will help you select the loan that works best for your unique situation.
Even if your expenses qualify for a personal loan interest deduction, it’s never a good idea to borrow money if you have unstable employment or income. Failure to repay or make on-time monthly payments could ruin your credit.
Where To Get A Personal Loan
Personal loans are available from credit unions, banks, and online lenders. Each lender will offer different rates and terms, so be sure to shop around.
Here’s how these lenders compare:
Credit Unions: Credit unions are not-for-profit organizations that reinvest profits back into the organization, so members benefit from lower interest rates on loans. Credit unions also tend to have low fees or no fees — advantages that most banks and online lenders don’t offer. CU SoCal does not charge fees on personal loans.
Banks: Traditional banks tend to have higher credit score and income requirements than credit unions, which could make it more difficult to get approved for a loan. If you have bad credit, getting a low rate on a personal loan from a bank can be challenging. Banks may also take longer to release funds, so ask how long the approval and funding process will take before you apply.
Online Lenders: While numerous online lenders offer personal loans, they don’t offer the personalized customer service of a local credit union or bank. They may also have higher interest rates and hidden fees and terms. Before you sign for an online loan, call the company’s customer service to make sure there is a customer support team. Here are some tips for
avoiding online loan scams.
To learn more read, “
Where Can I Get a Personal Loan at a Good Rate?”
CU SoCal Personal Loans
At CU SoCal we help our Members get approved as quickly as possible for personal loans. We offer personal loan financing from $500 to $30,000. We provide members with great benefits including no application fee, no prepayment penalty, and no funding fee.
For more details on CU SoCal Personal Loans click here.
Why Savvy Consumers Choose CU SoCal
For over 60 years CU SoCal has been providing financial services, including personal loans, HELOCs, car loans, mortgages, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.
Please give us a call today at 866.287.6225 today to schedule a no-obligation consultation with one of our experienced personal loan customer service specialists.
Apply for a CU SoCal personal loan today!
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