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If you owe money to the IRS, it’s in your best interest to pay up by the due date. The IRS can tack on penalty fees and interest to a late balance until it’s paid in full — so the longer you wait, the more you’ll owe. But if you have a tax bill and no way to pay it right away, what are your options?

One solution is to pay with a personal loan, which is a lump sum of money a bank lends you to be repaid over time with interest. These types of loans can make a big tax bill more manageable, and you may save money over using other options.

Why use a personal loan?

Taxes are due in full to the IRS by April 15 every year (unless that date falls on a holiday or weekend). This year taxes are due on April 15. If you fail to pay the tax bill in full, however, the IRS can charge a monthly penalty of 0.5 percent of the unpaid balance (up to 25 percent of the amount owed), plus an extra percentage of the balance that compounds daily.

If you’re running up against the deadline without cash to pay the tax bill, then using a personal loan is fairly simple. After you research personal loans and fill out an application, the lender will review it and run a hard credit check. If approved, you may get the funds by the next day, which you would send to the IRS as payment. Then, you’ll make a monthly payment to your lender over time.

Although you can use a personal loan to pay for just about anything, some lenders impose restrictions. Before applying, confirm that the lender will allow you to use the funds to pay for a tax bill — and make sure the monthly payment fits into your budget. Amounts usually range from as little as $500 to as much as $100,000, and interest rates range from about 6 percent to 36 percent.

Every loan is a little different. Some of the factors that could change include:

  • Collateral: Most personal loans are unsecured, meaning you don’t have to put down collateral to qualify. These are typically reserved for people with higher credit scores. A secured loan, on the other hand, is backed by collateral that a lender can take if you default on the loan.
  • Lender: Banks and credit unions may offer special interest rate discounts if you’re already a customer. Online lenders don’t have brick-and-mortar locations, so they may pass on the savings to you via lower interest rates or have lower credit score requirements. Peer-to-peer lenders also let you apply online, but the funding will come from an individual rather than a banking institution.
  • Type of interest rate: A variable interest rate can fluctuate with the market over the course of the loan, but a fixed rate will remain the same. The details should be spelled out in your loan agreement.

How to qualify for a personal loan

Lenders want to make sure you’ll pay back the borrowed funds, so they’ll typically look for:

  • A strong credit score that shows a history of paying back debt on time.
  • A low debt-to-income ratio to ensure you haven’t taken on too much debt.
  • Regular income to pay back the loan.

If you’re not sure you’ll meet these requirements, look for lenders that can run a pre-qualification check. They’ll review your credit report and credit score after performing a soft credit inquiry, which means your credit won’t be dinged.

Alternatives to personal loans

A personal loan isn’t the only way to pay off a tax bill, though you’ll have to do the math for yourself to see what makes sense for you. Calculate the interest and fees you’d pay for a personal loan, and compare it to these options.

IRS payment options

The IRS knows it can be hard to come up with the cash if you owe money at tax time, so it offers two payment plans:

  • Short-term payment plan: Under this plan, you’ll pay the tax agency within 120 days. The IRS doesn’t charge a fee to set up this arrangement, but interest and penalties continue to accrue until you pay your balance in full.
  • Installment agreement: You’ll tell the IRS how much you can pay over time every month, and the tax agency can either approve or deny your request. There’s a setup fee for this option with interest and penalties continuing to accrue.

If you can’t pay off the tax bill within 120 days, and you’re not approved for the installment agreement, then a personal loan could be a good option for you.

“The interest rate is ridiculously low with the IRS,” says Kristin Ingram, CPA and owner of Accounting In Focus, an accounting education website. “But if you think it will take you a while to pay this off, then a personal loan might be a better option because the penalty can get very high.”

Credit cards

The IRS will allow you to pay for your tax bill with a credit card, but it will charge a processing fee of up to 1.99 percent of the balance. Plus, you’ll need to consider credit card interest costs. The average credit card APR is currently 17.85 percent which can really add up if you stretch payments over time. Consider using a credit card with a 0 percent introductory APR for a long timeframe — think 18 to 21 months. But if you can’t pay off your balance before the promotional period ends, then it could make sense to use a personal loan instead.

Bottom line

The best option for you will cost you the least amount of money in interest and fees. Among personal loans, credit cards and the IRS’ payment plans, calculate the interest costs and fees to see where you might come out ahead.

Also consider adjusting your taxes so you don’t find yourself in the same position next year. Ask your employer to withhold more taxes from your paychecks, or if you’re self-employed, work with an accountant to figure out how much to pay in quarterly estimated taxes.

“Make those changes now so you never have to worry about this again,” Ingram says.

You can also plan to save money throughout the year to cover any “surprise” financial situations without having to go into debt.

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