Are Personal Loans Tax Deductible

Picture this: you take out a personal loan to cover last month’s surprise dental bill, pay down your high-interest cards, maybe even take a much-needed break somewhere warm. Then tax season rolls in… and you wonder—can you write off any of that interest? The short answer: not usually. And yet, that doesn’t stop people from hoping. Many folks assume any loan interest must be tax-deductible “somewhere,” especially after hearing stories about deductions on mortgages or student loans. But the IRS isn’t as generous when it comes to personal debt. Most personal loans don’t qualify for special tax treatment—at all.

That said, there are a few paths where personal loan interest might be deducted—if, and only if, the money is used in a very specific way. From side hustle launch costs to stock market plays, these exceptions are worth a second glance. But blink too fast, and you’ll miss the fine print. Here’s what most people get wrong, when the IRS might surprise you, and what to keep track of if you’re hoping to find any silver lining in your interest payments.

What The IRS Says (And What Most People Get Wrong)

When it comes to personal loans, the IRS draws a clear line: interest paid isn’t deductible if it goes toward personal spending. That covers things like travel costs, home repairs, weddings, or even consolidating other debts. From the government’s perspective, these are considered lifestyle choices—not investments in growth or income generation.

A big point of confusion? Credit cards and personal loans are often lumped together as just “debt,” without looking at how the money’s used. And that’s where the taxation conversation stops cold. Most tax deductions are designed to support money that creates more money—like business endeavors, higher education leading to income, or investments that grow wealth.

Here’s a breakdown of why most interest payments won’t help lower your tax bill:

• Credit card interest: Always non-deductible if used for personal expenses.
• Personal loan interest: Same story unless used in certain deductible pathways (more on that below).

A common myth floating around is that any interest might be deductible “if you just track it,” or assume there’s a secret form out there to help you claim it. That’s wishful thinking. The IRS doesn’t reward borrowing unless it fits into one of its approved categories. Treating personal loan interest like mortgage interest or student loan interest just doesn’t fly unless you’ve followed some strict rules.

Clear-Cut Exceptions: When Interest Is Potentially Deductible

Okay, now for the good stuff. There are situations where using a personal loan can sneak you into deduction territory—but each one has caveats and quirks.

Interest For Business Use

Say you launch a freelance gig or start selling on Etsy, and you borrow $10,000 to get started—gear, website, inventory, the works. If that loan is used strictly for business, the interest you pay could be deducted as a business expense. The IRS allows this under Schedule C (for sole proprietors) or via your LLC’s tax forms.

But it’s not a free-for-all. You can’t mix personal and business expenses under one loan without keeping airtight records. To prove deductibility, you’ll need:

Education Costs (But Only If Qualified)

Here’s a tricky one. If you take a personal loan to pay tuition, can you write off the interest? Only if you meet very specific rules. The federal student loan interest deduction is limited to loans that are officially considered education loans by the lender—and that’s the problem.

Most personal loan lenders don’t designate funds for school-only use. Even if you use it for college expenses, it won’t count. For interest to be deductible under the education rules, the loan usually needs to qualify as a student loan under IRS definitions. And most personal loans don’t make the cut.

Short version: if it’s not issued as a student loan or through a qualified lending program, you likely won’t get the tax break—even if the money went straight to your school.

Investment Purposes (Taxable Only)

Thinking of borrowing to buy stocks, real estate, or other income-generating assets? That’s one of the rare times personal loan interest might come back around at tax time.

Under the IRS’s “investment interest” rules, you may deduct interest paid on loan funds used to buy taxable investments—like shares of stock, mutual funds, or income-generating real estate. But the deduction is limited:

• Only up to your net investment income (e.g., dividends, interest, or capital gains)
• Does not apply to tax-free assets like municipal bonds
• Must be properly documented and reported using IRS Form 4952

Here’s where it gets messy: if you use a personal loan for both investing and other personal spending, only the interest portion tied to the investment counts. That means tracking usage down to the dollar—and being ready to prove it. Plus, any investment income has to be active and taxable for the interest to qualify.

Another catch? If you pay more in interest than you earn from your investments that year, the excess interest can’t be deducted. It may carry forward, but it won’t knock your taxes down right away.

The bottom line? If your personal loan isn’t linked directly to creating income—through a business, eligible education, or taxable investments—the interest is just another cost. A necessary evil in some situations, sure—but not a tax advantage.

New for the current year: The Electric Vehicle (EV) Interest Loophole

Getting hit with high car loan interest on an EV and wondering if there’s anything the IRS is doing to ease the blow? For the first time ever, there’s a yes—kind of. The the current year tax update brought in something no one expected: a federal deduction for interest paid on qualifying loans for clean vehicles, including electric and hybrids. This is a pivot from business-only interest deductions to including certain personal-use loans—if you meet the requirements.

The the current year update that shocked tax advisors

Under the “One Big Beautiful Bill Act,” starting in tax year the current year, regular folks with new EV or hybrid car loans (personal vehicles only) can deduct up to $10,000 in loan interest annually. The catch? You have to buy a new, U.S.-built car between the current year–2028 and meet some income tests. This isn’t an extension of a credit like we’ve seen before—it’s a full-blown deduction, fitting into a tax benefit lane normally reserved for businesses or mortgages. Interest on used cars? Still out of luck.

Who qualifies and what counts

• Cars must be brand-new, electric or hybrid, and assembled in the U.S.
• Ownership must be personal—no business-use cars allowed.
• Your adjusted gross income must be under $100,000 (single) or $200,000 (married) for full eligibility.
• You’ll need to file with the vehicle’s VIN and a formal lender’s interest reporting form.

This benefit only lasts through 2028, and only applies to loans taken out within that window. If you refinance the loan during that time, it may still qualify—so long as the car and use still meet the criteria.

Why this breaks the old rulebook (and what critics are saying)

Old-school tax advisors are blinking twice at this because, for decades, interest on car loans for personal use has been off-limits. No deduction. No workaround. Suddenly, EVs and hybrids changed the narrative. This flips the long-held IRS stance of “consumer interest = personal = no deduction.” Some folks love it—it’s seen as a reward for going green. Others argue it favors higher-income households who can afford new EVs, while leaving out low-income buyers who rely on used vehicles with sky-high interest rates.

For now, it’s a rare case of personal debt interest sneaking into deductible territory—but don’t count on it staying forever. It’s technically a pilot program. Whether it expands or dies quietly depends on the next few tax cycles and shifting policy goals.

Edge Cases and Confusing Scenarios

Not every personal loan comes from a bank. And not every deduction fits cleanly into a box. Here’s where things get murky—and sometimes weird—fast. Some people borrow from relatives, mix loan uses, or try to squeeze business expenses before a business exists on paper. Sound familiar?

Family and friend loans

Your cousin lends you $8,000 to buy an EV with the same terms your credit union offered. Is the interest deductible? Unfortunately, probably not—unless you meet the same reporting requirements as formal lenders and you bought a qualifying new vehicle. But most friend/family deals are casual, and IRS rules on “gift loans” kick in here.

If a personal loan is under $10,000 and used for non-income-producing purposes (like buying a car or paying for a wedding), there’s no imputed interest, no reporting required—and no deduction. The distinction between loan and gift matters. A real loan has written terms and repayment. A disguised gift? No tax benefit either way.

Backdoor business deductions

Say you take out a personal loan a week before launching your freelance photography business, buy all your gear, and plan to write off the interest. Will it fly? Possibly—but the IRS may scrutinize it. The burden’s on you to prove the loan was used exclusively for business. If there’s even a hint the funds went toward personal expenses too, the deduction might be denied.

This gets sticky when deductions are claimed before the business officially exists. No LLC filed? No business bank account? That doesn’t mean it’s impossible, but your receipts and planning better be meticulous.

Co-mingled purposes: part personal, part deductible

Using one loan for multiple goals—say, 60% for business operations, 40% to fund a Costa Rica trip—is chaos come tax time. The IRS requires you to track the split precisely. That means documenting how much went where and doing math to divide the interest accordingly.

• Only the business-use portion gets deducted
• If it shifts later (e.g. you sell your business gear), future interest is non-deductible
• Refinancing to consolidate or change loan use alters eligibility

Real talk: if your memory is foggy or receipts are MIA, don’t claim a deduction on a guess. The IRS doesn’t do vibes—it wants documentation.