Should I use a personal loan to pay my tax bill?


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Taking out a personal loan to pay taxes can be a way to avoid penalties and interest from the IRS on an unpaid tax bill. (Shutterstock)

Owing money to the IRS is never fun, but it can be especially nerve-wracking when you don’t have the money to pay your tax bill.

A personal loan may be an option for paying your federal income taxes. It might also cost less in the long run than other options, like an IRS installment plan. But is using a personal loan to pay taxes the right choice for you? Here’s what to know if you’re considering using a personal loan to pay your taxes.

Be sure to factor personal loan interest rates into your decision. You can easily view and compare personal loan rates from several lenders using Credible.

Should I take out a personal loan to pay my taxes?

Use a personal loan to pay your taxes is not the right decision for everyone. Personal lenders charge interest and some charge origination fees ranging from 1% to 8% of the loan amount. So if you have the savings to pay your tax debt or have a cheaper borrowing alternative, this is probably a better way to go.

But one Personal loan could be your best bet for paying your taxes if:

  • You face a tax bill and know you don’t have the money to pay your balance in full (or you won’t have the money soon).
  • The interest, penalties, and potential fees for setting up an IRS installment arrangement on your unpaid tax bill would outweigh the interest and fees of a personal loan.
  • You have good to excellent credit and can probably qualify for a low interest rate on a personal loan.

What happens if I can’t pay my taxes?

When you owe the IRS money, ignoring the debt is never a good idea. The IRS charges interest and penalties on unpaid taxes, and these penalties can add up quickly if your balance isn’t paid.

Depending on your situation, you could face penalties for failing to pay your tax bill and/or failing to file a tax return on time, and interest that accrues daily.

The IRS offers both short-term and long-term repayment plans, and you can apply for one by calling the IRS at 1-800-829-1040 or by request a payment plan online. IRS installment plans can be convenient and are usually less expensive than paying your tax bill with a high-interest credit card. But they have their drawbacks.

First, penalties and interest continue to accrue until your tax bill is paid in full. If the amount you owe is high and repayment will take several months or even years, this can significantly increase the amount you will ultimately pay. Also, if something happens and you can’t make a monthly payment on time, you’ll have to pay a $10 fee to revise your plan.

Installment plans and a personal loan could help you avoid the worst-case scenario of IRS collection actions, which can include:

  • Garnish your salary
  • Entering your bank account
  • Seize other assets and sell them to settle the debt
  • Placing a tax lien on your home or other property
  • Revocation or refusal of your passport

Where can I get a personal loan to pay my taxes?

A personal loan can be a good option to pay some or all of your back taxes. Because they are unsecured loans, you don’t need collateral to get a personal loan, and they’re usually widely available to borrowers with good credit.

You can find personal loans from several types of lenders, including brick-and-mortar banks, credit unions, and online lenders.

the minimum credit Goal required to obtain a personal loan varies by lender, but many lenders will tell you in advance what their minimum requirements are. The higher your score, the more likely you are to get favorable terms, including a lower interest rate, on your loan.

In any case, it is important to look for the best rate and the best conditions available. A personal loan is not necessarily like another. Finding the one that’s right for you — competitive interest rates, low fees, and affordable monthly payments — can take time and effort, but it’s often worth the effort.

Credible, it’s easy to compare personal loan rates from multiple lenders without affecting your credit score.

Advantages and disadvantages of using a personal loan to pay a tax bill

Personal loans can be an attractive option for paying your taxes, but each credit product has its pros and cons, and it’s important to weigh them carefully in light of your personal circumstances.

Benefits

  • May be cheaper than alternatives — Since November 2021, the average personal loan interest rate was 9.09%, compared to 14.51% for a credit card, according to Federal Reserve data. Rates can be even higher for a credit card cash advance.
  • You usually don’t need collateral – Personal loans are generally unsecured, so you don’t need to put up your home or other property as collateral like you would with a home equity loan.
  • Does not put your assets or property at risk — If you run into financial trouble and fail to meet an IRS installment plan, you may face IRS collections. This could mean the IRS seizes your wages or seizes your bank account or other assets. This does not happen with a personal loan.
  • Manageable monthly payments — A personal loan can allow you to spread the cost of your tax bill over several years, making your monthly payments more manageable.

The inconvenients

  • Go into long-term debt — Personal loans can help you avoid IRS collections or run up high-interest credit card debt, but they also increase your long-term debt load. This can negatively affect your credit score and increase your debt-to-equity ratio, making it harder to get approved for other types of loans, like a mortgage.
  • Can hurt your credit — If you’re having trouble making your payments, the lender may report late and missed payments to the credit bureaus, which can lower your credit score.
  • May not qualify for low rate — If you do not have solid credit, you could find yourself stuck paying a higher interest rate.
  • May not qualify for a large enough loan — If you have a large tax bill, it can be difficult to get a loan large enough to cover the full amount of tax you owe.

You can view your prequalified personal loan rates when you compare rates from multiple lenders with Credible.

Compare options for paying your tax bill

Personal loans are not the only option to pay your tax debt. Here is a comparison of your options and how they compare to an IRS payment plan:

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