Are Personal Loans Tax-Deductible?

Consolidating debt, covering an emergency, funding a side business: people take out personal loans for reasons that sound a lot like the reasons behind a mortgage or a student loan. The tax code doesn't see it that way. Personal loan interest is nondeductible personal interest, the same as credit card interest. Unless you can show where the money went.

When personal loan interest isn’t deductible

Personal loans are consumer debt, like credit cards. Unlike a mortgage or a federal student loan, the loan itself comes with no tax advantage, no matter how good a reason you had for taking it out.

One case worth ruling out, because it’s a new one: Since 2025 you can deduct up to $10,000 a year of interest on a loan used to buy a new car for personal use. But the loan has to be "secured by a first lien on the purchased vehicle". A personal loan isn't secured by the car, so it doesn't qualify. Neither does a home equity line you used to buy one.

Read more >> Is Car Loan Interest Tax-Deductible?

When personal loan interest is tax-deductible

There are a few circumstances where personal loan interest may be tax-deductible, but the deduction follows the money, not the loan. The IRS calls this allocating your interest expense, and it means tracing the loan proceeds to what you actually bought.

Business expenses

If you run a business full time, have a side business, or freelance, interest on money you borrowed for it is also a business expense. You deduct it on Schedule C, where it comes off your business income before both income tax and self-employment tax.

Note this only works for a trade or business you run. If you're an employee and you borrowed to cover costs for your job, the tax code treats that interest as personal interest that isn’t deductible.

Keep receipts and bank records showing what the money bought. You probably won't file them with your return, but they’ll be useful if you’re audited.

Qualified higher education expenses

A personal loan can qualify for the student loan interest deduction, but the loan must meet two requirements:

• It must be taken out solely to pay qualified education expenses. Borrow $10,000, put $8,000 toward tuition and $2,000 toward something else, and the loan isn't a qualified student loan at all.
• It can't come from a relative or a qualified employer plan. A loan from a parent, grandparent, sibling, or spouse never qualifies, which rules out many of the personal loans people take out for school.

If the loan satisfies both, qualified expenses cover computers or required course materials, tuition and fees, books, supplies, equipment, other necessary expenses like transportation and computer technology, and room and board up to the school's own cost of attendance. The student must be enrolled at least half-time in a program leading to a degree or credential.

You can then deduct the lesser of $2,500 or the interest you actually paid from your taxable income. You claim it as an adjustment to income, so you don’t need to itemize.

For 2026, the deduction shrinks once your modified adjusted gross income exceeds $85,000 ($175,000 on a joint return), and phases out completely at $100,000 ($205,000 on a joint return). You can't claim it if your filing status is married filing separately, and you can't claim it if someone else claims you as a dependent.

Taxable investments

If you use a personal loan to buy taxable investments, like stocks or taxable bonds, the interest may count as investment interest.

Two conditions decide whether it’s worth it:

• An itemized deduction on Schedule A, which you calculate on Form 4952. If you take the standard deduction, it doesn’t do anything for you.
• A cap at your net investment income — interest and ordinary dividends, but not qualified dividends or capital gains unless you elect to include them, which means giving up the lower rate on that income. So borrowing to buy shares you intend to hold often produces no usable deduction. Interest you can't use carries forward.

Interest on money borrowed to buy or carry tax-exempt securities, like municipal bonds, is never deductible.

Read more >> Student Loans Explained: What You Need to Know

‍You don't have to pay for tax help. The IRS runs Free File for most filers and VITA, which offers free in-person help for people under certain income thresholds, people with disabilities, and limited-English speakers. TCE covers anyone 60 or older. Reach out to 800-906-9887 to find a site, or call AARP Tax-Aide, which runs most TCE sites, at 888-227-7669. Enrolled agents are licensed by the IRS and generally cost less.

If your situation is more complicated, talk with a CPA or financial advisor for guidance specific to your situation.

Are personal loans considered taxable income?

If you’re approved, the lender deposits the funds in your bank account. So does that money count as income?

No. The IRS doesn’t count borrowed money you must repay as income, and a personal loan doesn’t go on your return.

Forgiven debt is different. If a lender cancels or settles part of what you owe, the IRS generally treats the forgiven amount as income, because you got the use of money you never paid back. A lender that cancels $600 or more will usually send you Form 1099-C showing the amount.

Generally isn't always. Debt canceled in a bankruptcy case is excluded from income, and so is debt canceled while you were insolvent (meaning your debts were greater than everything you owned, measured before the cancellation), up to the amount you were insolvent by. For each exclusion, you claim it on Form 982.

‍Bankruptcy is a complex legal process. Talk with a licensed bankruptcy attorney or a nonprofit credit counselor before deciding. Legal aid may be able to help for free if you qualify by income.

Read more >> How To Get A Lower Interest Rate On A Personal Loan

Bottom line

Personal loan interest is deductible only when the money went somewhere specific, such as a business you run, qualified education expenses, or taxable investments you hold. For most borrowers none of those apply, and nothing on the tax return changes what the loan costs.

The rate does. And the rate is decided before you borrow, when a lender prices the loan off your credit. Building credit before you apply is the one lever still open. The Kikoff Credit Account reports your on-time payments to Equifax, Experian, and TransUnion, there's no credit check to sign up, and plans start at $5 a month.