Are Personal Loans Taxable?

A personal loan is not taxable income, but there could be tax implications if it’s used for business expenses or forgiven.
Chanell Alexander
Nicole Dow
By Nicole Dow and  Chanell Alexander 
Edited by Kim Lowe
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Nerdy takeaways
  • You usually don't have to pay taxes on personal loans because they aren't considered income.

  • A personal loan used for personal expenses, like debt consolidation or a home renovation, is unlikely to be tax-deductible.

  • If a portion of your loan is forgiven, you may have to report the canceled debt as income on your tax return.

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Is a personal loan considered taxable income?

Personal loans aren’t considered income, so you usually don’t pay taxes on them.

While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it, which makes it a liability rather than taxable income.

A personal loan used for a common personal expense such as debt consolidation, a home improvement project or a wedding is unlikely to have any impact on your tax filings.

However, the loan may become relevant to your taxes if you use the funds in certain ways or if the lender forgives part of the debt.

Is personal loan interest tax deductible?

Unlike interest on a mortgage or student loan, personal loan interest is typically not tax-deductible.

However, there are a few instances when you may be able to deduct the interest. It depends on how you use the funds.

If you use a personal loan to cover business expenses, for example, the interest you pay could be tax-deductible. This means you could reduce your taxable income by the amount you spent on interest throughout the year.

Interest also may be deductible if you use the loan for educational expenses or certain taxable investments, but lenders often prohibit using a personal loan for those purposes.

Need help with taxes? Consult a tax advisor to fully understand the tax implications of your personal loan. Verify credentials and compare fees to select the best tax professional for you.

What happens if a personal loan is forgiven?

In the rare instances when a lender forgives a portion of a personal loan, the forgiven amount can become income and the borrower may need to pay taxes on it.

For example, if you receive a $10,000 loan and the lender forgives $2,000 of it, you may need to pay taxes on the $2,000.

If more than $600 of your debt is canceled, you’ll receive a Form 1099-C from the lender or debt collector with information about the canceled amount. Regardless of the amount, the forgiven debt should be reported on your tax return as income, according to the IRS.

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