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Paying taxes on time is crucial. If you can't do so, taking a personal loan is a viable option.
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The process of applying for an available personal loan is pretty straightforward.
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However, it's important to understand the pros and cons of using a personal loan to pay taxes.
Paying taxes on time is crucial. If you can't do so, taking a personal loan is a viable option. However, it's important to understand the pros and cons of using a personal loan to pay taxes. This article will provide some tips to make the most of this option.
You can improve your credit score with a personal loan.
How to Get a Personal Loan to Pay Off Tax Bills
The process of applying for an available personal loan is pretty straightforward. They’re also often easy to obtain and can be used for nearly anything, including paying tax debt.
Here’s how to go about it:
- Determine the borrowing amount: Only borrow what’s needed to pay off the tax debt. Borrowing too much could result in unmanageable debt or high monthly bills which you are unable to pay.
- Check your credit score: Getting a personal loan with fair or poor credit is possible, but borrowers with good credit (670+ FICO) usually qualify for the best rates. Checking one’s credit score before applying can help determine their eligibility. For those with poor credit, consider going with a secured loan instead.
- Compare lenders: Shop around to see what different lenders offer in terms of loan amounts, interest rates, any additional fees, and loan terms.
- Determine eligibility requirements: Check the lender’s eligibility requirements, such as a minimum credit score or maximum DTI ratio, before applying.
- Check for incentives: Some lenders offer an autopay discount with automatic withdrawals or flexible repayment plans.
- Read online reviews: Check online for personal loan providers reviews to see what customers are saying. The Better Business Bureau (BBB) is a good place to start.
- Get prequalified: Prequalification lets borrowers see what they might qualify for without impacting their credit score. It usually requires the borrower’s full name, basic contact and income information, date of birth, and Social Security number.
- Apply: After finding the best lender, complete the online application. This step usually results in a hard inquiry, which can remain on the credit report for up to 2 years. Applicants may also need to provide additional information, such as proof of income.
- Wait for approval: Some lenders offer same-day approval, while others take several business days.
- Make payments on time: Most lenders require the first payment within 30 days of receiving the funds. Pay on time to avoid late penalties or hurting your credit.
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Pros and Cons of Using a Personal Loan to Pay Tax Debt
A personal loan is an option for paying off tax debt, but it’s not always the best. Before applying for a personal loan, consider the following advantages and disadvantages.
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What Happens If One Cannot Pay Their Taxes?
If one does not pay their taxes by the final date for filing a tax return (which is on or around April 15th each year) they may start receiving debt collection notices in the mail, followed by phone calls. Although it may be possible to file for an extension, the person filing will still typically need to pay their tax debt by the April deadline. If the debt remains unpaid, they may receive a federal tax liens against their property or other assets.
There are several other consequences of not paying taxes, including the following penalties:
- Failure to file: This monthly penalty is for those who don’t file a tax return on time. It is for 0.5% of the unpaid amount starting from the month after the initial due date.
- Dishonored payment: If a check or other payment method doesn’t clear, there is typically a 0.2% penalty on the written amount.
- Failure to pay: The IRS charges 0.5% monthly on unpaid tax debt, capped at 25%. File on time and set up a payment plan for a reduced 0.25% rate. An automatic two-month extension can delay the late penalty, but interest charges still apply.
- Interest: Unpaid taxes also accrue interest that compounds daily from the day after taxes are due until they’re paid in full. The exact percentage is determined quarterly and is currently 3.00% plus the federal short-term interest rate of 0.81%.
The interest and penalties are based on how long the taxes are due and the amount owed. Because of this, it’s usually a good idea to make at least a partial payment to lower the total charges.
Also, it may be possible to remove or reduce late payment penalties by filling out a form with the IRS. To do this, provide a reasonable cause as to why the taxes are unpaid. Commonly accepted reasons include:
- Natural disaster
- Death in the immediate family
- An inability to get the records needed to file
Contact the IRS for more information for those needing help paying their taxes. A representative might be able to help by suggesting or setting up an appropriate repayment plan. Contact them before the taxes are due for best results and to avoid additional fees.
Alternative Options for Paying Taxes
If using a personal loan to pay taxes isn’t the right call, the IRS also offers the following payment plans:
- Short-term payment plans: This option grants the individual up to 180 additional days to pay their tax debt. It’s free to set up, but penalties and interest accrue until the debt is fully repaid.
- Installment agreements: For those needing more time, long-term payment plans are available, such as the direct debit installment agreement and the payroll deduction installment agreement. These require regular monthly payments and come with applicable interest and penalties. Some also cost a nominal fee to set up, depending on the individual’s income and plan type.
- Offer in compromise (OIC): Individuals with a qualifying financial hardship may qualify for an OIC. This agreement lets them pay less than what they originally owed. When applying for one, the IRS considers various factors, including income, expenses, assets, and ability to pay.
- Temporarily delayed collection: Those who can’t pay their taxes due to a specific financial hardship may be eligible for a temporary delay in collecting the taxes. The individual will still be responsible for any late penalties and compounding interest that accrues.
Contact the IRS to discuss tax payment plan options and for more information on each one. Outside of the IRS’ payment plans, here are some other options for paying taxes:
- Savings account: Typically offered by banks, credit unions, and online lenders, savings accounts are a secure way to store money while gaining a small amount of interest each month. If possible, plan ahead for next year’s taxes by setting aside some money in a savings account specifically for them. Even if it’s not enough to cover the full amount, it can help reduce the amount owed and prevent any late penalties.
- Home Equity Line of Credit: A home equity line of credit (HELOC) or a home equity loan can be used to pay taxes at a better interest rate compared to the IRS payment plans. Both methods do use one’s home as collateral, though, so defaulting on it could put the property in jeopardy.
- Credit cards: Although many credit cards have high-interest rates, some come with a low or 0% introductory APR that usually lasts 12 to 18 months. As long as the individual can pay the balance in full during this introductory period, they can avoid any additional late penalties or high interest rates from the IRS.
Bottom Line
For some people, a personal loan may be the best option to pay their taxes, especially if they’re trying to avoid penalties or higher interest rates with the IRS. It’s also possible to improve your credit score with a personal loan and good money management habits over time.
However, personal loans aren’t for everyone. That’s why there are other ways to pay taxes, such as with a low-interest credit card or an IRS payment plan. If you need more guidance on tax relief or want to be prepared for the next tax season, try to plan. That way, you can avoid a scenario in which you owe taxes in the future.
FAQ
Can personal loan be used for income tax?
If you owe money to the tax authorities and don't have the funds readily available, taking out a personal loan to cover your tax bill is an option. This can help you avoid penalties and interest charges from the tax authority for late payments.
Are personal loans taxable?
No, personal loans are not taxable because they are considered debt that you must repay, not income.
Do personal loans need to be reported on taxes?
No, personal loans generally do not need to be reported on your income tax return as income, because loans are not considered income in the eyes of the IRS or most tax authorities. Loans are a form of debt that you are obligated to pay back; therefore, they do not increase your net wealth.
Is there a personal loan to pay IRS taxes?
Yes, you can obtain a personal loan to pay IRS taxes. Many lenders offer personal loans specifically for the purpose of paying off tax liabilities. These loans can provide the funds needed to settle your tax bill with the IRS, helping you avoid penalties and interest for late tax payments.
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Angela Mae is a personal finance writer specializing in loans, debt management, investing, retirement planning, and financial literacy. She comes from a journalistic background and pulls from hands-on experience and deep-dive research to breathe life into her stories. Her goal is to help others achieve financial stability and independence. When not writing, she can be found traveling, honing her yoga skills, hiking, or exploring new means of healthy, sustainable living.
