There are many things you can use a personal loan for, from consolidating debt to a dream bar mitzvah bash, wedding or vacation. Many individuals with good credit and a healthy financial history use personal loans to meet both immediate and future financial needs.
The ranges for fixed interest rates can vary by lender. Discover Personal Loans, for example, has fixed rates that range from 6.99% to 24.99%. But is the interest you pay on a personal loan tax deductible? The short answer is no, personal loans unfortunately don’t make the cut when used for personal reasons at this time.
Personal expenses may include wedding expenses, vacation loans, or to consolidate high-interest debt from multiple credit cards used for restaurants, clothes, or any other personal items.
The key phrase is “when used for personal reasons” so continue reading for potential exceptions on when other types of loans and interest are tax deductible.
The Tax Reform Act of 1986 changed the game for many formerly deductible interest expenses such as consumer credit card debt. Legislation, of course, can always change, so you should consult with a qualified tax professional prior to making any major financial decisions.
Exception for Business Interest
The IRS does allow for an exception to the general rule that you can’t deduct personal loan interest.
If you were, for example, to use 30% of a personal loan for legitimate business expenses, you could deduct the “business interest” portion of that loan. The other 70% that may have been spent on a vacation or wedding would not be deductible.
“Business interest” refers to any funds used specifically for legitimate business expenses. Using a company credit card for personal expenses would not qualify for an interest deduction.
Also note that to deduct business interest from a personal loan, you must be the person legally responsible for that loan and you’ll have to do itemized deductions.
When Loan Interest Is Tax Deductible
The IRS states that specific situations meet the criteria for tax-deductible interest payments. Here are some examples for when your loan interest does qualify.
- Credit card interest (business use)
- Mortgage, home equity, or loan for an investment real estate property
- Student loan interest (use this tool from the IRS)
- Medical debt interest (*certain restrictions apply)
When Loan Interest Is Not Tax Deductible
“Personal interest” is exactly what it sounds like: funds used for yourself or family for everyday purchases. Here are some examples where the IRS has clearly stated the interest is NOT deductible:
- Credit card interest (personal use)
- Auto loans
- Utility bills
- Late or underpayment of all taxes owed
Keep in mind that when considering a personal loan, there are many good reasons for why it may make good financial sense to apply regardless of tax advantages. Here are some of the most common reasons why people apply for personal loans:
- Potentially lock in a lower, fixed interest rate
- Organize your finances by consolidating multiple credit cards
- Reduce the financial stress of a major life event with a fixed monthly payment plan over, for example, 36-84 months
- Upgrade to more energy-efficient appliances with a green loan