Are personal loans tax-deductible?
It’s always a good idea to understand the tax implications surrounding different finance products, this includes personal loans.
Generally, personal loans are not tax-deductible. If you borrow to purchase something such as a car for personal use, then the interest you pay on that loan cannot be claimed on your income tax return. However, there are always exceptions when it comes to loans, particularly if you use a loan for investment or business purposes. In these cases, there are some instances where you can claim interest paid on a loan.
So “are personal loans taxable?” – explore this guide to learn whether your personal loan is tax-deductible or not.
What is a personal loan?
A personal loan allows you to borrow a specific amount of money from a lender, and then repay the debt with interest over an agreed loan term.
Personal loans allow you to make urgent purchases when you don’t have the funds or savings to cover these expenses. In Australia, the most common reason people get a personal loan is to consolidate their debt. But other motivations behind getting a personal loan can include:
- Buying a new car
- Funding a home renovation
- Covering medical bills
- Funding a wedding
- Going on holiday
With that being said, it may seem logical that a personal loan would qualify as income that’s tax-deductible since it’s a form of funding granted to you to spend on yourself. However, this is not always the case.
What loans purposes are potentially tax-deductible?
There are also some instances where personal loans can be tax-deductible. These loans have interest that can be claimed on tax and may be useful to anyone who is hoping for a deduction on a loan.
Interest on student loans is generally tax-deductible. You may be able to claim a deduction on your student loan if the education is relevant to earning your income.
If you both work and study, then you may be eligible for tax deductions if you incur self-education expenses and are taking a course that is likely to lead to an increase in employment income.
Just like business-related expenses used on a business credit card is tax-deductible, so are business expenses funded by a personal loan. Similarly, if you borrow a loan to purchase a business vehicle, then some or all of your loan will be tax-deductible.
However, if you’re using the loan to finance both business and personal expenditures then you cannot deduct the entirety of the interest payments – only the percentage used to fund legitimate business expenses.
If you take out a loan to purchase a rental property, you can claim the interest charged on that loan or a portion of the interest as a deduction. However, in order to do so, the property must be rented or genuinely available for rent.
Similarly, if you borrow money to purchase a piece of land with the intention of building an investment property, then the interest will be deductible from the time you took the loan out.
As a rental property owner, you may also claim tax on:
- The purchase of depreciating assets
- Repair expenses
- Renovation expenses
Some rental property owners may borrow money to buy a new home and then rent out their old property. In this scenario, if there is an outstanding loan on the old home and the property is used to generate income, the outstanding interest or part of the interest on that loan can be tax-deductible.
Make your personal loan work for you
It’s always recommended to seek professional advice from a licensed tax professional before you file your taxes. You may be eligible for a tax deduction on your personal loan without even realising it.
For example, if you took out a personal loan to purchase a vehicle and use it mostly for business-related travel, then you may be able to get a tax deduction if you can provide clear evidence that your car is used for business travel. If, however, you have obtained a personal loan solely for personal expenses such as a holiday or financing a wedding, then you will not be eligible for a tax deduction.
Doing your research and comparing personal loans ahead of time can save you money in the long-run.
Sebastian has over 12 years experience in consulting, marketing and finance. He has worked with Australia’s largest banks and emerging fintechs across lending, investing and insurance. Sebastian has a Bachelor of Commerce and Bachelor of Laws with Honours.
How do I get a personal loan?
The first step in applying for a RateSetter loan is to request a RateEstimate. Your RateEstimate is an initial assessment of your eligibility to apply for a loan with RateSetter. It provides you with the estimated fees, charges and interest rate that may apply to your loan, taking into account a number of factors including your proposed loan term, amount, purpose and personal credit history
Requesting a RateEstimate won’t impact your credit score and there’s absolutely no obligation for you to proceed with a loan application. It’s free, secure, and will only take 1 minute to complete. To be eligible for a RateSetter loan you must
- Be aged 21 or over
- Be an Australian citizen or permanent resident
- Be earning over $25,000 per year from a regular source of income that you can demonstrate
- Have a good credit history
RateSetter will consider a loan application if you are self-employed. Additional credit assessment criteria and requirements may apply.
Are personal loans taxable?
Money received from loans are tax-exempt, but they can be subject to income tax under certain conditions. Personal loans are not considered income for the borrower unless the loan is forgiven. In other words, you cannot be taxed on loan proceeds unless the lender grants the borrower a reprieve on paying back the debt owed. This is known as loan forgiveness. In the event a loan is forgiven, the proceeds associated with the original loan are considered “cancellation of debt” (COD) income. COD income can be taxed.
Can I increase my personal loan amount?
If you need a bit extra, you can apply to increase your existing personal loan. You can do this easily by completing an online application. If approved, you’ll continue to have one loan amount and one repayment schedule. Depending on how much your repayments are increased by you may want to extend your loan terms during this process.
Can I take out a home loan after a personal loan?
A personal loan’s impact on your home loan application depends on whether you have the means and ability to meet both repayments. Existing personal loan commitments are factored into your home loan application by repayments being included in serviceability calculations.
Some lenders use a calculation known as ‘debt-to-income’ (DTI) ratio, which determines the percentage of your monthly income (before tax) that gets eaten up by debt and household expenses. In general, the lower your DTI ratio, the better your odds of getting approved.
What does conditionally approved mean for a personal loan?
When a lender conditionally approves a personal loan it means the loan will stand unless you fail to meet the stipulations the lender lays out. A conditionally approved loan comes after a pre-approval and before a fully approved personal loan.
Conditional approval comes once you have provided the necessary documentation to get your loan set up and verified and once an underwriter has dug a little deeper into your circumstance. At RateSetter we pride ourselves on reviewing loan applications in a fast and frictionless manner. It takes just five minutes to submit an application. Once we have received all required documents we aim to provide you with an outcome within 2 business days. If we approve your loan application, you will have two weeks to accept the loan before your approval is no longer valid. If you need additional time, please contact us.
This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.