How to use a personal loan to pay your tax bill

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If you owe the IRS and don’t have the cash to pay your tax bill in full and on time, there are other ways to pay so that you don’t end up owing penalty fees and interest.

One option is a personal loan, which is an unsecured loan distributed as a lump sum and repaid over time at a fixed interest rate. Using a personal loan can make a big tax bill more manageable, and it may cost you less than some other payment options.

Why a personal loan might make sense

If you’re close to the April 15 deadline and still don’t have the money to pay your taxes, using a personal loan is fairly simple, if you qualify. After you shop around for personal loans and fill out an application, the lender will review your application and run a hard credit check. If approved, you may get the funds as soon as the next day, and you could then send those funds to the IRS as payment. Then you’ll make a monthly payment to your lender until the loan is repaid.

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 money to pay a tax bill, and make sure that the monthly payment fits into your budget. Loan amounts can range from $1,000 to $100,000, and interest rates range from around 5 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 provide collateral. Unsecured loans 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. They may also have lower credit score requirements. Peer-to-peer lenders also let you apply online, but the funding comes from individual lenders rather than a banking institution.
  • Type of interest rate: A variable interest rate can fluctuate with the market, but a fixed rate stays the same for the duration of the loan term.

What happens if you can’t pay your taxes

Your 2019 tax return — with payment, if you owe — is due to the IRS by April 15, 2020. If you fail to pay the bill in full, the IRS can charge a monthly penalty of 5 percent of the unpaid balance (up to 25 percent of the amount owed).

If you cannot pay the full tax bill, you should still file your return by the deadline and pay as much as you can. You should also contact the IRS at (800) 829-1040 to talk about payment options.

IRS payment options

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

  • Full payment agreement: Under this plan, you may qualify for additional time, up to 120 days, to pay your tax bill. 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: The IRS may agree to a monthly payment plan with options for making those payments, including direct debit from your bank account, payroll deduction from your employer, payment online or over the phone via Electronic Federal Tax Payment System (EFTPS), payment via check or money order, payment by credit card or payment by cash at a retail partner. There is a fee for the installment arrangement.

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

“The interest rate is ridiculously low with the IRS,” says CPA Kristin Ingram, head of Ingram Digital Media, which teaches small-business owners and college students about bookkeeping and accounting. “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.”

Alternative payment options

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 which method makes sense for you. Calculate the interest and fees you’d pay for a personal loan and compare it to what you’d pay using a credit card.

The IRS will allow you to pay 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 close to 18 percent, which can really add up if you stretch payments over time.

Consider using a credit card with a 0 percent introductory APR for 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.

The bottom line

The best option for paying the IRS is the one that will cost you the least amount of money in interest and fees. Calculate and compare the interest rates and fees of personal loans versus credit cards and IRS payment plans to see which method is the best for you.

Also consider some adjustments 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 make a decision to set aside money throughout the year to cover any financial surprises so that you don’t have to go into debt.

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