Do You Have to Pay Taxes on Personal Loans? - Experian (2024)

Are Personal Loans Taxable?

Personal loans generally aren't taxable because the money you receive isn't income. Unlike wages or investment earnings, which you earn and keep, you need to repay what you borrow.

As a result:

• You don't report the money you borrow. The money you receive from a personal loan doesn't need to be included on your personal tax return.
• The type of financial institution isn't relevant. It doesn't matter if you got the personal loan from a bank, credit union, peer-to-peer lender or another financial institution.
• Loans from friends and family members might be different, however. If you borrow money from a friend or family member, the money won't count as taxable income for you, but there could be tax implications for the lender.

When someone lends you money and doesn't charge you interest, or charges a below-market rate compared to the IRS's current applicable federal rate, the IRS might consider the loan a gift or require them to pay income taxes on imputed interest.

• Loans that are considered gifts: A loan that isn't enforceable might be considered a gift and the lender may need to file IRS Form 709 with their tax return if the loan is for more than the annual gift tax exclusion for the year—$18,000 per recipient in 2024.
• Imputed interest on loans with below-market rates: Alternatively, if you receive a below-market-rate loan, the IRS may require the lender to pay income taxes on imputed interest—the interest they would have earned with a market-rate loan.

In either case, you don't need to report receiving the gift or below-market-rate loan, and you won't have to pay additional taxes.

Is a Forgiven Personal Loan Considered Taxable Income?

You may need to pay income taxes on a portion of a personal loan that's canceled, forgiven or discharged.

For example, if you have a $2,500 outstanding balance on a personal loan and the creditor agrees to settle the account for $1,500, then you have $1,000 in canceled debt.

• Canceled debt could be taxable income. Canceled or forgiven debt is generally considered income, even if part of the amount is from fees and interest. The lender will send you and the IRS a Form 1099-C with the canceled amount, which you can use to prepare and file your tax return.
• There are a few exceptions. A forgiven personal loan doesn't lead to taxable income if your debt is discharged during bankruptcy. Additionally, if you're insolvent (you owe more money than your current assets) when your debt is forgiven, then part or all of the forgiven debt could be excluded from your gross income.

You could wind up with a similar situation with other types of debt as well. With some federal student loan repayment plans, your remaining student loan debt will be forgiven after you make payments for 20 to 25 years. The forgiven amount is generally considered taxable income, although there is a temporary exemption for amounts forgiven through 2025. Other student loan forgiveness programs may also lead to debt forgiveness that doesn't have tax consequences.

Are Personal Loan Payments Tax Deductible?

The personal loan payments you make are not tax deductible. The money you receive isn't income, and repaying the principal balance won't affect your taxes one way or the other. You won't even need to include the loan or file any extra forms with your tax return.

However, even when you can't deduct what you're repaying toward the principal balance, there are a few situations when you can deduct the interest you pay—more on that in the next section.

Is Personal Loan Interest Tax Deductible?

You might be able to deduct the interest you pay on a personal loan if you use the loan for specific purposes:

• Business expenses: If you use the personal loan for your business, you might be able to deduct the interest as a business expense.
• Qualified educational expenses: You also might be able to deduct your interest payments if you use the entire loan to pay for qualified educational expenses for yourself, a spouse or a dependent—or if you use the personal loan to refinance an existing student loan. In either case, the total student loan interest deduction is capped at $2,500 annually and may be lower depending on your income.
• Certain taxable investments: You might be able to deduct the interest as an itemizable deduction if you use the loan for investing in certain types of assets, such as eligible stocks and bonds. You can only deduct up to the amount of investment income you had for the year, but you can roll over additional amounts to offset future years' investment income.

Although the tax code allows you to deduct personal loan interest payments in these situations, many lenders explicitly forbid borrowers from using loans for these expenses.

Even if you find a lender that doesn't have these restrictions, you might qualify for a loan with better rates or terms elsewhere. For instance, federal student loans may offer lower interest rates and are eligible for special forgiveness and repayment programs, and private student loans may have more flexible repayment schedules.

When to Report Personal Loans on Your Tax Return

Based on the various situations described above, you may need or want to report the personal loan on your tax return when:

• Part of your loan was canceled or forgiven
• You used the loan for business expenses
• You used the entire loan for educational expenses
• You used the loan to purchase taxable investments

In other situations, you generally don't have to include your personal loan or loan payments in your tax return.

Compare Loan Options to Find a Good Rate

Shopping for a personal loan can help you find the lowest rates and terms, which is ideal regardless of whether you'll be able to deduct your interest payments. Your credit score will often be a major factor, as personal loans are often unsecured. Experian can help you find personal loans matched to your unique credit profile without hurting your credit score.