Nearly every homeowner or business owner has taken a loan at some point in their lifetime. It may be a car loan, student loan, mortgage, or business financing. Taking a loan should not always be considered a bad idea because, with a loan, you get closer to achieving the things you would otherwise not afford from your savings or earnings alone. Among the many reasons why most people prefer to take personal loans include accessibility, they are easy to manage and have a predictable repayment schedule. In addition to this, they attract a lower interest rate than most credit card loans.
Despite the common misconception, that debt is the mother of all evil, poor planning is to be blamed for all the misfortunes associated with personal loans. With this in mind, it’s very important to commit yourself to a plan before taking on a personal loan. In addition to this, before taking one, you also need to learn a thing or two on both the downside and the benefits of personal loans.
To get you more informed, below are the tax aspects surrounding personal loans that you may need to know.
Can You Be Taxed on a Personal Loan?
A personal loan is a type of loan that can either be secured or unsecured. It’s for this reason that most people prefer personal loans over other types of loans. While on the
same note, personal loans can be used for about any purposes and it’s this flexibility that also makes them quite popular. In addition to this, personal loans are not considered as income and its perhaps the main reason
why they don’t attract a lot of attention from the IRS. This is because the money isn’t yours and you have not earned it as you would through profits from your business or wages from your job. According to financial
experts at https://www.loanry.com/blog/personal-loans-cost-interest-fees-more/, a personal loan is borrowed money that’s meant to be paid back in full to the lender, along with a pre-agreed interest amount. This means that it does not fall under tax-deductible money. However, there
are various interest exceptions under which a personal loan can be taxed. They include:
● Forgiven loan – One thing to note is that when the lender decides to forgive the borrower either in full or partially, then the forgiven amount can be taxed. This is because
you are no longer required to pay it, meaning that the remainder or balance will be considered as income by the IRS and is tax-deductible. If the lender releases you from the responsibility of paying off a personal loan, you
need to make note of it in your next tax return forms. They’ll make the provisions for you to stop paying the taxes on the loan balance and also receive a tax deduction.
● When the personal loan is used for business expenses – Before you use a personal loan on your business expenses, it’s important to note that the business expenses funded by a personal loan will be tax-deductible. As the name suggests, personal loans are meant to be used for personal uses such as funding a vacation trip, refinancing other debts, or for home remodeling purposes. Using a personal loan on business-related expenses will attract taxes. While it can initially seem like a good idea to fund your business projects with a personal loan, it may damage your credit if you fail to repay your loan on time and in addition to this, you may have to deal with IRS people for tax fraud.
Types of Loans That Are Tax-Deductible
Unlike personal loans, different types of loans are taxable. This means that if you qualify for one, you may have to pay tax-deductible payments. Such loans include:
● Student loans
● Property-related loans – Home equity, mortgages, and property investment loans
● Credit card loans
Can You Pay Your Taxes Using A Personal Loan?
This is among the many frequently asked questions regarding personal loans and taxes. This is an attractive option, especially if you’re behind on paying your taxes and have no other options. Unlike using your credit card to pay for your taxes, using a personal loan will attract lower interest rates, it may be less than what the IRS plan demands, and you have a predictable repayment plan. The drawback, however, is that you’ll be getting yourself into more debt and you also risk damaging your credit score.
Finally, it’s always important to weigh your options before taking a loan. If it’s your first time applying for a loan, you need all the help you can get. Choose financial institutions that offer free advice on their loan facilities. Alternatively, you can choose to hire a financial advisor, especially when dealing with taxes.