You don’t have much choice when it comes to paying taxes. However, you do have options on how to pay them. Writing a check is certainly one way, but in some cases, it may not be the best financial strategy. You may be in a situation where borrowing the money may be a better choice.
“Looking at all of the potential options can help you achieve your goals,” says David Mook, chief private banking officer at U.S. Bank Wealth Management. “This can be the case if you have an unusually high tax liability due to a large taxable event, such as selling a company or an asset that incurs capital gains, or if you just pay a lot in taxes every year. The government mandates when taxes are due, but that date may not make financial sense for you. Using credit can give you flexibility and control over when to liquidate an asset or come up with the cash.”
If you’re willing to consider debt to pay your taxes, here are three types of loans you could use to pay taxes.
Paying taxes is never a fun experience, but sometimes an unexpected tax bill can really throw your finances for a loop. If you find yourself lacking the funds to pay what you owe the IRS, you may be tempted to take out a personal loan to cover the costs. But is this really a good idea?
At my blog I want to take an in-depth look at whether using a personal loan to pay taxes is advisable. As someone who has found themselves in this situation before I understand the panic that can set in when you don’t have the money to pay taxes you owe. However, there are pros and cons to taking out a personal loan for this purpose, and also some alternative options worth considering.
An Overview of Using Personal Loans for Taxes
A personal loan is a type of installment loan that you repay over time in fixed monthly payments Personal loans can be unsecured or secured With an unsecured personal loan, you don’t put up any collateral. Secured personal loans require an asset like your car or home to act as collateral.
Personal loans typically have higher interest rates than secured loans like mortgages or auto loans. However, they may have lower rates than other unsecured options like credit cards.
You can use a personal loan for almost any purpose, including paying your taxes. The amount you can borrow with a personal loan usually ranges from $1,000 to $100,000. This makes them a potential option for covering tax bills.
Personal loans offer fixed interest rates and a set repayment term. This allows you to spread out the cost of your tax bill over time. Rather than a lump sum payment, you’ll make the same monthly payment over a period of months or years until the loan is paid off.
Pros of Using a Personal Loan for Taxes
There are some potential benefits to using a personal loan to pay the IRS:
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Avoid penalties: The IRS charges penalties for late payment, which can add up quickly. With a loan, you avoid these extra costs.
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Predictable payments: A personal loan offers fixed monthly payments over a set period. This makes budgeting easier.
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Fast funding: Many lenders can fund personal loans within just 1-7 days. This provides quick access to cash.
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Flexible terms: You may be able to choose a loan term from 1-7 years. A longer term means lower payments.
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Can borrow a large amount: Some lenders offer personal loans up to $100,000, enough to cover even very high tax bills.
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May improve credit: Making consistent on-time payments can improve your credit score over time.
Cons of Using a Personal Loan for Taxes
However, there are also some potential drawbacks with using a personal loan for taxes:
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High APR: Personal loans can come with APRs from 6% to 36%. With bad credit, you may pay rates on the higher end.
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Debt burden: A new loan adds to your overall debt load and can negatively impact your debt-to-income ratio.
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Risk of default: Missing payments can significantly hurt your credit score and lead to collection calls.
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May require collateral: Secured loans require tying up assets as collateral you could lose.
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Prepayment penalties: Some lenders charge fees if you pay off the loan early.
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Origination fees: Many lenders charge 1% to 10% of the loan amount in upfront fees.
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Tough approval: It can be hard to qualify with bad credit or a low income. Co-signers may be required.
As you can see, there are advantages and disadvantages to keep in mind. A personal loan brings unique risks and downsides.
What Are the Alternatives to Paying Taxes With a Personal Loan?
Before taking on an expensive personal loan, it’s wise to consider some alternatives. Here are a few options:
Payment Plan With the IRS
You may be able to set up a payment plan directly through the IRS, allowing you to pay over time. Short-term plans are available for balances under $100,000 paid within 180 days. Long-term plans go up to 72 months for balances under $50,000. This avoids loan costs but still has fees and interest from the IRS.
Credit Cards
A 0% APR credit card can give you over a year to pay off your balance interest-free. This only defers interest if you can’t pay in full when the promotional period ends. Credit cards also charge convenience fees for tax payments.
401(k) Loan
You may be able to borrow from your workplace 401(k) up to either $50,000 or 50% of the vested account balance, whichever is less. This avoids credit checks or income requirements. However, your retirement savings take a hit.
Home Equity Loan
If you’re a homeowner with sufficient equity, a home equity loan or HELOC can provide fixed interest rates under 10%. But your home is at risk if you default.
Family Loan
Asking relatives for help can provide low or no interest financing. Just be sure to formalize the terms and repayment schedule in writing to prevent misunderstandings.
Key Factors to Consider Before Using a Personal Loan for Taxes
If you do opt to take out a personal loan to pay the IRS, be sure to consider these key factors:
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Interest rate – Compare rates across multiple lenders and for secured vs. unsecured loans. Good credit scores can lower rates.
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Loan amount – Only borrow as much as absolutely needed to cover your tax liability.
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Loan term – A longer term means lower payments but higher overall costs. Find the right balance for your budget.
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Fees – Watch out for origination fees. Lenders deduct them from the loan proceeds.
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Prepayment penalties – Avoid loans with these fees for paying off early.
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Payment schedule – Make sure the payment due dates align with your pay schedule.
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Impact on credit – Will a new loan improve or lower your credit scores?
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Qualifications – Do you meet lender requirements for this type of loan?
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Tax deadline – Ensure loan funding will come through prior to when taxes are due.
Considering these factors will help you make a fully informed decision about using a personal loan for your taxes.
Final Thoughts on Personal Loans and Taxes
Paying off a tax bill with a personal loan can provide immediate access to funds needed to square up with the IRS. However, it also comes with costs and risks that can negatively impact your finances in the long run.
While a personal loan is one option, make sure to thoroughly explore alternatives like payment plans, borrowing from retirement, or even requesting a filing extension. The right choice depends on your personal financial situation.
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- Borrowing money to pay your taxes can give you more control over when to come up with the cash.
- Options include a home equity loan, a personal loan or liquid asset secured financing, each with its advantages and risks.
- It’s best to consult with your tax and financial professionals to determine which option fits your financial goals.
You don’t have much choice when it comes to paying taxes. However, you do have options on how to pay them. Writing a check is certainly one way, but in some cases, it may not be the best financial strategy. You may be in a situation where borrowing the money may be a better choice.
“Looking at all of the potential options can help you achieve your goals,” says David Mook, chief private banking officer at U.S. Bank Wealth Management. “This can be the case if you have an unusually high tax liability due to a large taxable event, such as selling a company or an asset that incurs capital gains, or if you just pay a lot in taxes every year. The government mandates when taxes are due, but that date may not make financial sense for you. Using credit can give you flexibility and control over when to liquidate an asset or come up with the cash.”
If you’re willing to consider debt to pay your taxes, here are three types of loans you could use to pay taxes.
Home equity loan to pay taxes
If you own a home or vacation property, you can tap into its equity by taking out a loan or line of credit to pay taxes.
One drawback is that this type of loan can take some time to set up, since the bank will need to appraise your home and prepare title work. You may also be charged upfront costs that could include an appraisal fee, credit report fee and loan origination fee. And rates may be higher than some of your other options.
After weighing the pros and cons, Mook says home equity loans may be a good choice for some people. “Most people are very comfortable having debt on their house,” he says. “Just about everybody has or has had a mortgage. This may be a more comfortable choice than other options.”
Personal Loan to Pay Taxes: Wise Move?
FAQ
Can I get a personal loan to pay taxes?
Can I get a loan to pay off back taxes?
Does the IRS care about personal loans?
Can you write a personal loan off your taxes?
Can I take out a personal loan to pay my taxes?
While you can take out a personal loan to pay your taxes, you can also set up a payment plan with the IRS. You must owe less than $50,000 to be eligible for a long-term payment plan and less than $100,000 for a short-term payment plan.
Is money that you loan to someone taxable?
According to **Forbes** , **MarketWatch** , and **Experian** , personal loans are not considered taxable income because they are borrowed money.Unlike wages or investment earnings, which you earn and keep,
Should I use an IRS payment plan or a personal loan?
If you’re on the fence between using an IRS payment plan or a personal loan to pay your taxes, there are a few alternatives to consider. For example, the IRS makes it possible to pay your tax bill with a credit card in exchange for an upfront fee of 1.85% to 1.98%, depending on the platform you use.
Should I get a personal loan if I have a tax bill?
A personal loan isn’t the only solution if you have a tax bill you can’t afford to pay. Here are several alternatives. An IRS payment plan is a deal you make with the IRS to pay your tax bill over time. There are short-term IRS payment plans for taxpayers who owe less than $100,000 and can pay the balance in 180 days.