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If you’ve taken out a personal loan for debt consolidation or a major expense, you may wonder if the money you received is taxable or if the interest you pay is tax-deductible.
In most circumstances, a personal loan won’t have any tax impact. However, we’ll cover a few situations in which a personal loan could have tax implications.
Are personal loans considered taxable income?
Personal loans aren’t considered taxable income, because they’re a type of debt.
While a personal loan provides you with a lump sum of money that you can spend like income, you must repay it. That makes it a liability rather than taxable income.
A 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 the lender forgives part of the debt.
What happens if a personal loan is forgiven?
In the rare instance when a lender forgives a portion of a personal loan, the unpaid portion of the loan is no longer considered a liability. The IRS will usually treat the forgiven amount as income, though there are some exceptions. You may need to pay taxes on the amount of debt that was forgiven.
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 should receive a Form 1099-C from the lender or debt collector with information about the canceled amount. The IRS states that in most cases, forgiven debt should be reported on your tax return as income, regardless of the amount.
» MORE: How does debt settlement work?
Is personal loan interest considered tax-deductible?
Although the interest you pay on some types of loans, like a mortgage or student loan, is often tax-deductible, personal loan interest is not tax-deductible in most situations. This means taking out a personal loan typically won’t lower your taxable income or tax bill.
However, there are a few instances when you may be able to deduct the interest you’ve paid on a personal loan, depending on how you use the funds. Personal loan interest could be tax-deductible if you used the money for:
- Business expenses.
- Investing.
- Rental property.
The guidelines on what you are able to deduct from your taxable income may be complex and could require you to itemize your return instead of claiming the standard deduction. It’s also important to note that tax laws can vary by state.
If you’re unsure if a personal loan will have tax implications, consult with a tax professional.
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.
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- 1. IRS. Canceled debt – Is it taxable or not?. Accessed Jan 29, 2026.
- 2. IRS. Form 1099-C. Accessed Jan 29, 2026.
- 3. IRS. Interest expense. Accessed Jan 29, 2026.
