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Are Personal Loans Considered Income?

October 16, 2020 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

Are Personal Loans Considered Income?

Sometimes you may run into a situation in which you need a little extra money to pay for unexpected expenses, consolidate credit card debt, or even do something fun like remodel or make a big move.

If your income doesn’t cover those costs that’s where a personal loan might come in. But is the cash influx from a personal loan considered income for tax purposes?

Does a Personal Loan Count as Income?

If you’re spending the money that is disbursed from a personal loan on personal expenses it might feel sort of like you’re spending your own money. Is a personal loan considered income?

Generally, no. A loan, whether a student loan or a personal loan, is not usually considered income because it has to be paid back. That makes it a debt liability or obligation, not a source of income.

There can be some complications when it comes to informal loans from a friend or family. And, if it’s really a gift from family (and not a loan), then you could be subject to gift taxes depending on the amount. This is why you may want to consult with an accountant about potential tax implications.

However, any kind of formal loan from a bank or lender with terms that require repayment is considered a debt and is typically not considered income.

Because a personal loan generally is not considered to be income, it is typically not taxable and does not have to be declared on your taxes.

There are a few exceptions, though, to when loans are considered income, which we’ll get into below.

When is a Personal Loan Considered Income?

If you take out a personal loan and then some or all of the loan debt is forgiven, then the amount forgiven could be considered income . Loan forgiveness or debt cancellation means you do not have to repay the amount of the loan that has been cancelled or forgiven.

It might seem odd for cancelled debt to be considered income, but think about it like this: If, hypothetically, you made an extra $5,000 from work and used it to pay off your personal loan, that $5,000 would be considered income and your loan would be paid off.

However, if you made no extra money but your $5,000 loan was cancelled, then you would be in the same financial position in the end—and so the IRS considers that forgiven loan debt taxable income.

Once a formal debt is forgiven or cancelled, you should receive a Form 1099-C from the lender. The IRS has specific rules about how and when loans are considered income. According to the IRS, the amount of the canceled debt—whether it’s the whole loan or just a portion left that you still owe—is taxable and must be reported on your tax return for the year.

There are some specific exceptions, such as certain qualifying student loan cancellations or personal loans cancelled as part of bankruptcy hearings, but that’s where professional tax guidance might come in handy. Another thing to know is that the interest on personal loans is generally not tax-deductible.

What Exactly is a Personal Loan?

A personal loan is one of many types of loans offered by banks, credit unions, and online lenders like SoFi. As opposed to a business loan or a home loan, an unsecured personal loan can be spent on a range of personal expenses—from home renovations to medical bills to consolidating credit card debt.

Personal loans typically range from $1,000 to $100,000 depending on the lender. There are both secured and unsecured personal loans. A secured personal loan means that there is some sort of collateral to back the loan.

With an unsecured loan, there is no collateral. Generally, personal loans are unsecured. And the terms of the loan—including things like interest rates, origination fees and repayment schedules—are typically based on an applicant’s financial history, income, debt and credit score.

Exact eligibility requirements will vary by lender. The loans are then typically paid back with interest in monthly payments over a set schedule; typical repayment terms are extended over anywhere from 12 to 60 months.

Personal loans have few restrictions on how the money can be spent (for example you can’t use a personal loan for business expenses), and as a result, there might be some confusion about whether they’re taxed as income.

One survey indicated that just over one-third of Americans took out a personal loan in 2018 with an average loan amount of $7,576 and, according to that survey (conducted by Pureprofile), some common reasons for taking out a personal loan were car expenses, paying off bills, and unforeseen emergencies.

We all know these kinds of things happen to everyone, but before you apply for a personal loan it can be helpful to understand how they work, so you can decide if borrowing one is the right option for you.

Before applying for a personal loan, consider starting with this checklist: explore all your financial options, determine how much you need, research various loans and lenders, choose the type of loan you want, and compare interest rates.

If you’re using a personal loan to pay off existing debt, you could also use SoFi’s personal loan calculator to compare payments and rates to see if an unsecured personal loan could potentially help you save money (one of many reasons people consider personal loans over accruing other kinds of debt).

Applying for a Personal Loan

Personal loans can be a useful tool for covering unexpected expenses or big purchases, but it’s important to weigh all the pros and cons. Unsecured personal loans can have higher interest rates than secured personal loans because unsecured loans aren’t tied to an asset (like a home, car, etc.).

Even so, unsecured personal loans typically have lower interest rates than credit cards or payday loans. Applying for a personal loan is relatively straightforward and typically requires your basic financial history. Many lenders offer applicants the option to see if they pre-qualify for a loan, which can give them an idea of the rates and terms available to them.

You can then compare a few quotes from different lenders to see which offers the best rates and terms for you. As you are comparing lenders, be sure to factor in any hidden fees—or any fees at all.

SoFi personal loans have no origination fees and no prepayment penalties. Borrowers may also qualify for unemployment protection in the event they lose their job.

If you feel a personal loan is right for you, you can pre-qualify with SoFi in just two minutes.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

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