Can You Write Off the Interest From a Secured Personal Loan?
Secured personal loans are rare products. Most personal loans are unsecured and either closed-end or revolving. A typical consumer loan, or personal loan, is a credit card. In some cases, especially if a borrower has poor credit, a lender will use a home or car to collateralize the account. In some cases this interest is tax deductible.
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IRS Definition
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The U.S. Internal Revenue Service allows for interest deductions for all loans that are tied to primary residences. This includes first and second mortgages, as well as any home equity lines of credit. These deductions are taken on Schedule A of your tax return. In most cases, you need to itemize your deductions to ensure your total deduction--including your mortgage interest--exceeds the standard deduction.
Unsecured Personal Loans
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The IRS does not allow for interest deductions on any loans that are not secured to a primary residence. Thus, the interest on credit cards, car loans and personal loans do not qualify for a deduction. An exception might be for self-employed persons, but most often these become business expenses.
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How Is It Secured?
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The most important question in determining deductibility is to what a loan is secured. For example, if you have a loan that is secured with a boat, you'll be unable to deduct the interest. The same is true for any loan tied to a car. In fact, the only way in which personal loan interest is deductible is if it is tied to your primary residence. In this case, it is considered a mortgage.
How to File
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Since a personal loan tied to a home is considered a mortgage--regardless of the loan amount--you'll file for a deduction the same way you'd file for your first mortgage interest. Remember that itemization is necessary. Your personal loan lender will send you a form 1098 at the end of each year listing all interest paid.
Warning
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Secured personal loans can be a big risk. If you have a small personal loan on your primary residence, the lender has your home as collateral. This means that even a small default--like on a $100 or $150 payment--can put your home at risk of foreclosure. Exhaust all options for unsecured credit--especially for small loan amounts--before putting your house up as collateral.
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