Is Payday Loan Interest Tax Deductible?

Written By Devi Kristanti on Tuesday, July 15, 2014 | 3:12 AM


One of the major concerns for payday loan borrowers is the fear of high interest rates and fees. While many people rely on these loan services to fund emergencies and/or cover recurrent bills, there appears to be a general anxiety about the cost of such services. This fear might be accentuated by the knowledge that while most of the income made from the interest on savings accounts or bonds is taxable, the interest accrued on a payday loan is not tax deductible.

A borrower might assume that the interest accrued on a paycheck advance can be written off at the end of the year, thus making the paycheck advance option more appealing. Yet, unlike other loan options, such as student loans and home loans, the interest paid on a payday advance cannot be deducted when itemizing your taxes. One stipulation exists, however, for payday advances obtained for business purposes.

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A business owner can write off the interest accrued on a payday loan if the loan was explicitly and solely used for business purposes. A business owner needs to be aware, though, that he/she must be able to prove that the loan was used to fund the business. Considering that most businesses have established relationships with credit unions and banks already, seeking a loan from said institution might be a better option than relying on a payday advance, having to pay the interest, and then having to prove that the loan was used for business purposes when the IRS comes around for an audit.

This isn't to suggest that a payday loan is necessarily a bad option for individuals or a business when in a bind. Rather, it is to inform borrowers of the reality of their loan benefits prior to tax season and to offer possible alternatives to these types of advances.

The following is a list of tax-friendly options:

*Make interest instead of paying interest. As mentioned before, savings accounts, IRAs, and bonds can accrue substantial interest. Though this interest is taxable, it is also extra income that can come in handy in a sticky financial situation. Rather than idly waiting for an emergency that might lead one to a loan lender, try to invest money every month to prepare for unexpected expenses. In the meantime, you might even make a little extra cash!

*Research refinancing options for an existing loan to attain a little extra cash. Refinancing can save a person a great deal of money because it often involves a reduction in the loan's interest rate. Additionally, some loans can be borrowed against without penalty, meaning an individual can get cash without paying extra fees and interest. This isn't the case for all loans, of course, so consult your loan holder before making any financial loan decisions.

*Consider a credit card cash advance. Admittedly, a credit card advance has the potential to accrue as much, if not more, interest as a payday loan; however, if paid back before the next payment cycle, a borrower can avoid interest altogether. Unlike with a loan, wherein interest begins to accumulate immediately, with a credit card advances a borrower can avoid interest if they can pay off the advance promptly.

Prepare yourself for tax season by seeking the best possible options financial options. If you require quick cash, consider payday advance options, but be aware of the cost of interest.


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