Personal Loans

Personal loans are not counted as income and are therefore not subject to federal income tax. Interest on personal loans is not tax deductible as with mortgage loans, however. If personal loans are ever partially or completely discharged or forgiven as part of a personal bankruptcy or a debt restructuring the amount not paid will be considered income and will be subject to federal income tax.

Applying for one or more personal loans can affect your credit score, as lenders must pull your full credit report before approving a loan in order to determine your creditworthiness. A full credit check, also known as a hard pull of your credit, can temporarily lower your credit score by a small amount. How you maintain the status of your personal loan also affects your credit score. If you make payments on time and in full it will help your credit score and if you don’t it will hurt your score.

As with taking on any type of debt, personal loans can present certain risks - the biggest being not being able to service the debt in the form of making monthly payments. This can lead to damaged credit, having the debt go into collections and potentially having to take drastic steps like declaring personal bankruptcy.

Credit cards are similar to personal loans in that they are extensions of unsecured credit. However, personal loans are generally lump sum loans made by lenders to consumers with a specific repayment term and fixed interest rate.  Credit cards are revolving lines of credit with balances that can be paid back over time if not paid in full each month.

Interest rates on personal loans can vary significantly based on the credit score of the borrower as well as income level, amount borrowed and the lender involved. Most personal loans are made at fixed interest rates but variable interest rates that are indexed to the prime rate will likely become more common in a rising rate environment as lenders seek to keep consistent profit margins.