Should You Use a Personal Loan to Pay Taxes?
Personal loans can help you afford a hefty tax bill, as well as avoid penalties and liens from the IRS. However, personal loans can come with interest and fees, so it’s important to compare the overall cost of taking out a loan versus an alternative form of financing.
Should you use a personal loan to pay taxes?
Generally, you should exhaust your other options — such as enrolling in an IRS payment plan — before getting a personal loan to pay off IRS debt.
Personal loans can cost you extra in terms of fees and interest, especially if you have a low credit score. Ultimately, you’ll want to go with whatever option costs you the least amount of money in the long run, whether that’s a personal loan or an alternative route.
Pros and cons of taking out a personal loan to pay taxes
| Pros | Cons |
|---|---|
You’ll quickly clear your debt with the IRS, which means they can’t levy your property or charge you a failure-to-pay penalty You can get the money you need quickly, sometimes as soon as the same day you apply You’ll pay off the debt in equal monthly installments, since personal loans have fixed APR and monthly payments Depending on your creditworthiness, you may be able to qualify for a low APR, though you’ll need to have excellent credit | Personal loans, which don’t require collateral, can have high APRs (especially when compared with secured loans) If you have a thin credit history or don’t have good credit, it may be difficult to qualify for a personal loan Personal loans come with interest and you may have to pay common charges, such as origination fees Taking out a personal loan can cause your credit score to go down via a hard credit inquiry, though this is typically by a small number |
What happens if you can’t pay your taxes?
If you don’t pay your taxes, you could drive up the cost of your tax bill even higher by receiving the following penalties. Plus, the IRS will charge you interest on any unpaid penalties.
If you don’t file on time
If you owe money and don’t file your tax return on time, the IRS will charge you a failure to file penalty. The penalty is 5% of your unpaid taxes for each month or partial month the filing is late. This penalty is capped at 25% of your balance.
Avoid this penalty by applying for a filing deadline extension. This penalty doesn’t apply if you don’t owe taxes.
If you don’t pay on time
If you owe taxes and don’t pay them by the due date, you’ll face a failure to pay penalty. For each month or partial month the tax is unpaid, the IRS will charge you 0.5% of the unpaid amount. The penalty is capped at 25% of your unpaid balance.
If you’re on an IRS payment plan, you’ll still receive this penalty, although it’s discounted by 0.25% per month or partial month. If the IRS sends you an intent to levy notice and you still don’t pay, your penalty can increase.
In addition to this penalty, the IRS will also charge you interest on the taxes you owe. The interest rate is set each quarter. As of the first quarter of 2023, this interest is 7% for individuals and 9% for corporations, compounded daily.
If your payment bounces
Another penalty applies if your tax payment doesn’t go through. For bounced tax payments of $1,250 or more, the IRS will charge a 2% penalty. For bounced tax payments below that, the IRS will charge the amount due or $25, whichever is less.
Alternatives to personal loans to pay off your taxes
If you need tax debt relief but don’t think a personal loan is a good fit for you, you can consider these alternative options:
Apply for an IRS payment plan
The IRS offers both short and long payment plans if you can’t afford your taxes. Eligibility depends on how much you owe, and both plans come with penalties and interest that accrue daily until your tax debt is paid in full.
| Short-term payment plan | Long-term payment plan | |
|---|---|---|
| Maximum amount owed | Under $100,000 | Under $50,000 |
| Set-up fee | None | $31-$130 |
| Interest rate (as of 2023 Q1) | 7% | 7% |
| Payment timeline | 180 days | Until the tax debt is paid |
Use a no- or low-interest credit card
Instead of applying for a personal loan, you could take out a low-interest credit card or 0% intro APR credit card and use it to pay your unpaid taxes. The latter option is best because it allows you to pay your tax without accruing interest for several months after opening the account. You’ll want to pay off your tax bill before the promotional period ends, however, or you’ll have to pay interest on the remaining card balance.
Borrow from friends or family
Getting a loan from a loved one can make for a sticky situation, but it may be an option for you to avoid high interest and fees. Be sure to create a loan agreement with your family member and iron out details like interest, fees and due dates to avoid tension down the road.
Frequently asked questions
If you’ve filed your income taxes and find yourself with an overwhelming tax bill, you can sign up for an IRS payment plan, consider a personal loan or apply for a credit card.
Each option comes with its own pros and cons, so it’s important to weigh how much each route may cost you. If you take out a credit card or loan, interest and fees can vary based on your credit, so you’ll want to compare numbers to ensure which is the cheapest solution for you.
The IRS doesn’t often forgive tax debt — but when it does, it’s referred to as an “offer in compromise.” To qualify for this debt forgiveness, the IRS will examine the following criteria:
- Ability to pay
- Income
- Expenses
- Equity in assets
Yes — if you owe taxes, you can still qualify for a loan. However, tax debt can increase your debt-to-income ratio, which lenders will take into account when considering you for a loan.