Should You Use a Personal Loan to Pay Your Taxes?

by Christy Bieber | Updated July 21, 2021 - First published on Feb. 20, 2020

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You can use a personal loan to pay the IRS what you owe, but is it a good idea?

You can use a personal loan to pay the IRS what you owe, but is it a good idea? 

If your taxes are due and you owe money to the IRS that you can't pay, you're probably wondering what your options are. One possible solution would be to take out a personal loan and use the proceeds to pay the IRS. 

Taking out a personal loan to repay tax debt can be a smart move in some situations, but it isn't always your best bet. You need to carefully consider all your alternatives before you decide what's right for you. 

When does it make sense to take out a personal loan to pay your taxes?

One situation when it could make sense to take out a personal loan to pay your taxes is when that loan would be cheaper than entering into an IRS payment plan. 

The IRS offers several different plans for those who can't pay their taxes on time. That includes a short-term plan for those who'll be able to pay what they owe in 120 days or less. There's also a long-term plan that allows you to enter into an installment agreement and pay over more than 120 days.  

If you enter into any payment plan, you'll owe accrued penalties for being late. You'll also owe interest on your unpaid balance. The rate, which equals the federal short-term rate plus 3%, changes quarterly. If you opt for a long-term plan, you'll also owe a $31 setup fee if you enroll online or a $107 fee if you set up your plan in person.

If you can qualify for a personal loan with no origination fees and an interest rate below what the IRS charges, using a personal loan could save you money and could make a lot of sense. 

However, you should bear in mind that some lenders have minimum amounts for personal loans. If you'll only owe a few hundred dollars to the IRS, you may not be able to find a lender willing to lend you that small of an amount.

You should explore other options before taking out a personal loan

A personal loan isn’t the only alternative to an IRS payment plan. If you can't pay your taxes, see whether there are other options that might cost you less.

One route might be to pay your taxes with a credit card. If you can qualify for a card that has a 0% introductory APR, this may be your most affordable way to borrow. If the 0% promotional rate lasts for a year, you'd have a long time to pay off your tax debt without paying interest on it. Be aware, though, that you would have to pay a fee of at least 1.87% of the balance due in order to pay your taxes with your credit card. 

If you won't be able to pay off your tax balance before the 0% promotional rate expires or if you cannot qualify for a card that offers no interest on purchases, a personal loan would likely cost you much less in interest than paying your taxes with a credit card.

Be smart about how you handle tax debt you can't pay

Whether you opt for a personal loan, an IRS payment plan, or a credit card, the key is to find the most affordable way to handle your unpaid tax balance. 

Whatever you do, don't just ignore the problem and not file or not pay your taxes, because this could lead to collection actions against you and potentially even legal trouble as well.

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