Personal loans are used for various purposes; some people use them to pay for their tuition, home renovation or car repairs. While these loans can help you get the money you need quickly, they also come with high-interest rates. The good news is that you can reduce your tax burden by taking advantage of specific deductions on your loan.
What does a personal loan mean?
A personal loan is a contractual agreement that allows you to borrow money from a lender. You can use the money for any purpose, including buying a car or paying off credit card debt. It’s important to note that personal loans differ from home loans, car loans and credit cards because they don’t have collateral attached.
What are the tax implications of a personal loan?
You can deduct the interest you pay on a personal loan. Interest is tax deductible if the loan was used for a qualified expense, such as education or medical expenses. However, interest on credit card balances and cash advances from your credit card account are not tax deductible.
What about personal loans? In most cases, interest payments are considered nondeductible personal expenses unless the repayment of that loan meets one of two conditions.
First, it’s needed to produce self-employment income, or it’s used to purchase property that will be rented out. Examples include:
- Borrowing money from your father to buy his car when he no longer needs it.
- Borrowing money from your brother so he can go backpacking through Asia.
- Using funds from one of these loans to purchase a rental property.
Can you claim tax deductions on a personal loan?
Personal loans are treated as any other interest-bearing debt regarding tax deductions. You can claim a personal loan tax deduction on personal loans in the same way you would for any other debt, including credit card payments and student loans.
Personal loan interest is deductible from your taxable income. The amount of deductible interest depends on how much you earn and whether or not you have other kinds of income, like investment earnings or job wages, that are taxed at a higher rate than the personal loan interest.
How can you claim tax deductions on a personal loan?
A loan is a debt that the borrower must repay to the lender. In other words, it’s money borrowed by one party in return for interest or collateral. Personal loans are those granted to individuals who know each other personally and may have certain social or business relationships. This type of loan doesn’t require any credit check and has no collateral except your promise to repay it within a specified time frame (usually ranging from 6 months to 10 years).
The interest rate associated with personal loans depends on several factors, such as:
- amount borrowed;
- credit score; and
- collateral offered (car/property).
Lantern by SoFi experts explains, “. If you do not use the loan for one of these reasons, then interest you pay on a personal loan probably isn’t tax deductible.”
Personal loans can be a great way to pay off your debts or start a new business, but they may have some tax implications you should know about. If you are thinking of taking out a personal loan, you must understand all the details to make an informed decision before signing on the dotted line.