Is a Personal Loan Tax Deductible?

If you’re looking for personal finance to help you out of a jam or to purchase a big-ticket item, one of the many questions you might be pondering is a personal loan tax deductible.

What is a personal loan?

A personal loan is just that – personal. The motivations people have for obtaining a personal loan vary, but typically, they’re for something special like travel, a new car or maybe new furniture. They may also be to cover a shortfall that you might have.

Personal loans are repaid with interest over an agreed term which is typically between one and seven years. Personal loans can be obtained from banks or other lenders and the fees and rates are likely to vary significantly so it’s important that you undertake sufficient research to find the best loan for your needs.

Is a personal loan tax deductible?

Personal loans are typically not for work-related costs or your mortgage. However, sometimes you might choose to obtain a personal loan to help cover these expenses. In this instance, you may be able to obtain a tax exemption. As with anything finance-related, it’s important you keep detailed records to share with your accountant or financial advisor, as these may help to determine whether the loan is tax deductible.

If you use a personal loan to pursue training or a course related to your current job for career progression, the course fees may be considered as a deductible self-education expense. This means you may be able to seek a tax exemption on the interest of the loan. However, this isn’t as straightforward as it sounds. The course needs to be directly related to your current position.

If you’re a small business owner, you may also utilise a personal loan to help with various business expenses. Obtaining a loan as an individual compared to a business is often an easier, more straightforward process. Additionally, because the interest costs aren’t being accrued by the business itself, but by the individual business owner, you can claim a deduction on the interest in your own personal income tax (try our free Income Tax Calculator here).

The purpose of the money is what matters

The type of finance you apply for - whether it’s a personal loan, a credit card, or a car loan - is irrelevant when it comes to taxation. How you use the money is what matters. Your expenses are tax deductible if they are associated with income-generation activities. For example, business-related expenses or investments. So, if you are wondering if it’s possible to claim your personal loan as a tax deduction, you will need to determine whether the loan is tied to an income-producing activity.

A personal loan is not your only option

A personal loan is often the go-to thought when someone is seeking personal financial support. While a personal loan may be the right finance option for you, there are other options to consider depending on why you are seeking finance.

Car loan

This is a loan designed specifically to facilitate the purchase of a car. With secured and non-secured loans available, interest rates will vary depending on the type of loan.

If you are planning to obtain a personal loan to purchase a car, it is worth doing your research beforehand as at times, even an unsecured car loan might have lower interest rates.

Credit card

Similar, to a loan, a credit card is a line of credit offered by a bank or financial institution that you need to pay back with interest.

There are four main types of credit cards including standard cards without all the bells and whistles, rewards cards that can provide you with extra benefits, a secured credit card which is an option for people who may have little to no credit history or a bad credit rating and finally, a charge card which differs slightly. With a charge card, there is no pre-set spending limit, but the balance needs to be paid-in-full each month.

When it comes to limits, credit cards can start with as little as $500 with the cap varying significantly. While it’s less common, some credit card limits can even go up to $100,000!

A credit card may be another option to consider instead of a personal loan. Particularly if it’s a short-term loan. It’s worth exploring both options side by side and considering aspects like the term, exit fees, account fees and interest.

If you want to learn more about credit cards, read our blog, ‘What are Credit Cards and Should You Get One?’

Business Loans

If you’re a business owner considering a personal loan to give your business a leg up, it might be worth exploring a business loan as an alternative. Business loans are designed with businesses in mind and there are also the options for the loan to be secured or unsecured which can impact your interest rate. One of the best things about a business loan is it’s clearly distinguishable as related to an income-generating activity it should be tax deductible.

Read more about business loans here, ‘Everything You Need to Know About Business Loans.’

Put simply, the question shouldn’t be, ‘is a personal loan tax deductible?’ Instead, you should be considering the purpose of the loan and if, in fact, a personal loan is the best finance option for you.