Is Personal Loan Interest Tax-Deductible?

Personal loan interest usually isn't deductible. The IRS puts it in the same bucket as credit card interest and installment interest, which is nondeductible personal interest.

Three uses change that, each depending on where the money went: into a business you run, into qualified education expenses, or into taxable investments. Each carries conditions most borrowers don't meet, and only one of the three requires you to itemize.

When personal loan interest isn't deductible

Most of the time, you can’t deduct personal loan interest. A personal loan is installment credit, so the interest falls under nondeductible personal interest along with credit card interest. It doesn’t matter whether you used the loan to consolidate debt, cover a car repair, or pay a medical bill. None of it is deductible.

One case worth ruling out, because readers ask: 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.

When personal loan interest is tax-deductible

There are a few circumstances where loan interest is 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.

That's simple if the lender wires you $8,000 and you spend $8,000 on one thing. It gets complicated the moment the money lands in an account that already has other money in it. The IRS provides guidance that helps as the split between deductible and nondeductible interest changes.

Business expenses

If you run a business full time, have a side hustle, 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

You might already know about the student loan interest deduction, and it isn't limited to federal loans. Private student loans can qualify, and so can a personal loan.

But it must meet two requirements:

1. The loan 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.
2. 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 tuition and fees, room and board, 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.

Three more conditions: 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. First, it's 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.

Second, it's capped eat your net investment income. Icnterest and ordinary dividends, but not qualified dividends or net 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 to a year when you have the investment income to absorb it.

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

Do I need to itemize to claim personal loan interest?

If none of the three fits your situation, there’s nothing to claim or document.

If you're not sure how much of it counts, a CPA or enrolled agent can work it out from your records.

‍You don't have to pay for tax help. The IRS runs Free File for most filers and VITA, which offers help for people under certain income limits, people with disabilities, and limited-English speakers. TCE covers anyone 60 or older. Call 800-906-9887 to find a site, or call AARP Tax-Aide, which runs most TCE sites, at 888-227-7669. For anything more complicated, talk with a CPA or enrolled agent. Enrolled agents are licensed by the IRS and usually cost less.

What about the loan itself?

Borrowed money isn't income, because you have to pay it back. So a personal loan doesn't go on your return at all.

Forgiven debt is where it gets complicated. If a lender settles or cancels part of what you owe, the IRS generally treats the canceled amount as income, though there are exceptions that matter a great deal if you were insolvent or in bankruptcy when it happened.

Read more >> Are Personal Loans Tax-Deductible?

Bottom line

Whether you can deduct the interest comes down to where the money went. Into a business you run, qualified education expenses, or taxable investments, and some of it may be deductible. Anywhere else, and the tax return isn't going to change what the loan costs.

But the rate will. A lender sets it when you apply, off a credit file you built months earlier, which makes the cheapest move on a personal loan one you make before there's a loan.

A Kikoff Credit Account puts an account in your own name that reports on-time payments to Equifax, Experian, and TransUnion. No credit check to sign up, and plans start at $5 a month.