If you’re facing a big tax bill, a personal loan may let you avoid costly IRS penalties and interest.
Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
Every year, about a third of all taxpayers wait until the last minute to file their federal income tax returns. If you were one of them and underestimated your 2023 tax obligation, you could soon owe money to the IRS.
If you made a mistake calculating your taxes or filed your return but didnt pay the full amount you owe, you could get a CP14 notice from the IRS — the service usually sends them out within 60 days of deciding your tax return misstated the amount you owe.
If you owe taxes that you can’t fully cover on your own, a personal loan could be an option.
Owing taxes to the IRS can be stressful, especially if you don’t have the funds readily available to pay off your tax bill in full. You essentially have two options – set up an IRS payment plan to pay over time, or take out a personal loan to cover the amount owed. But which option is better for your situation? Here’s a detailed comparison of IRS payment plans versus personal loans to help you decide.
Overview of IRS Payment Plans
The IRS offers payment plans or installment agreements that allow you to pay your tax debt over time in monthly installments, This can help taxpayers who cannot afford to pay their entire tax bill at once
There are two main types of IRS payment plans
-
Short-term payment plan – Allows you to pay your tax bill in full within 180 days. You can qualify if you owe less than $100,000 in combined taxes, interest, and penalties.
-
Long-term payment plan – Allows you to pay your taxes owed in monthly installments over a period of up to 72 months (6 years). You can qualify if you owe $50,000 or less in total IRS debt.
With an IRS payment plan, you will owe interest on the unpaid balance and there may be setup fees. However, the ongoing interest rate (currently 8%) and late payment penalty rate (0.25% per month) are generally lower compared to interest rates on personal loans.
Overview of Personal Loans
A personal loan from a bank, credit union or online lender is an alternative way to pay your IRS tax debt in full. Personal loans can be secured or unsecured – unsecured loans are more common and don’t require you to put up any collateral.
Personal loan amounts usually range from $1,000 to $50,000 and terms range from 1 to 7 years generally. Interest rates on personal loans currently average around 11% but can be lower for borrowers with good to excellent credit (credit scores above 670).
Taking out a personal loan means you get a lump sum upfront to pay your tax bill in one shot. You then make fixed monthly payments to the lender until the loan is repaid.
IRS Payment Plan Pros
- Lower interest rate than most personal loans
- Payments are fixed based on what you owe the IRS
- Can get up to 6 years to repay your tax debt
- Avoid taking on additional debt through a personal loan
IRS Payment Plan Cons
- Limited eligibility based on amount owed
- Paying interest and fees to the IRS
- Potential hassle of enrolling and staying compliant
- Tax refunds or other assets may still be at risk of IRS levy until balance is paid
Personal Loan Pros
- Fast approval and funding to pay IRS right away
- Fixed payments and terms that you agree to upfront
- May get better rates with good credit
- Avoid interacting with the IRS further on collection activity
Personal Loan Cons
- Higher interest rates, especially with poor credit
- Monthly loan payments added to your regular bills
- Credit check and approval required
- Putting your tax debt onto another loan just prolongs it
Key Factors to Consider
When deciding between an IRS payment plan and personal loan, here are some key factors to weigh:
-
Interest rates – Compare the IRS plan rate (8% now) to personal loan rates you may qualify for based on your credit. The better your credit, the lower the interest rate lenders will offer.
-
Eligibility – Make sure you qualify for an IRS payment plan based on the amount you owe. If you owe over $50K total, a personal loan may be the only option.
-
Credit impact – Will taking on another loan hurt your credit or debt-to-income ratio? On the flip side, paying off IRS debt could help improve your credit over time.
-
Fees – The IRS charges setup fees for payment plans. Personal loans often charge origination fees. Compare total costs.
-
Time to repay – IRS plans give you up to 6 years. Personal loans often max out at 5 years. Make sure you can handle the monthly payments.
-
Asset protection – The IRS may still try to levy assets like bank accounts and wages during a payment plan if you fall behind. A personal loan gets them paid in full immediately.
Options for Paying the IRS
Beyond an IRS payment plan and personal loan, a few other options to consider for paying off IRS tax debt include:
-
Credit card – Pay your tax bill directly with a credit card but watch out for fees of around 2% on the amount paid.
-
401(k) loan – Borrow from your 401(k) retirement savings temporarily to pay the IRS if your plan allows.
-
Offer in compromise – Negotiate to settle your tax debt with the IRS for less than the full amount owed in some cases.
The Bottom Line
When deciding how to pay off taxes you owe the IRS, carefully weigh the pros, cons and costs of an IRS payment plan versus taking out a personal loan. Factors like interest rates, credit impact, eligibility and time to repay will help determine the better option for your financial situation. Consider all options – including credit cards, 401(k) loans and negotiated settlements – to find the right solution and become debt-free.
Use a credit card
You could also consider putting your tax balance on a credit card. Some cards offer 0% APR introductory periods, which means you could avoid paying interest if you can repay the balance by the end of this period.
However, if you can’t pay off the card in time, you could be stuck with hefty interest charges.
IRS payment processors typically charge a fee of up to 1.98% for using a credit card. If you owe $2,500, for example, you could end up with a fee of $49.50 if you pay it with a credit card.
Consider a personal loan
If you’d rather deal with a personal loan lender instead of the IRS, you might consider paying off your taxes with a personal loan. In fact, the IRS says that often the cost of a loan is less than the penalties and interest the IRS charges under federal law.
Most personal loans are unsecured, which means you won’t have to worry about collateral such as your home or vehicle. These loans typically range from small loans of a few hundred dollars up to $100,000 or more, depending on the lender.
You’ll generally need good to excellent credit, usually meaning a FICO score of 670 or higher, as well as verifiable income to qualify for a personal loan. The time to fund for personal loans is generally within a week — and some lenders will fund approved loans as soon as the same or next business day.
Depending on the lender, you’ll typically have one to seven years to repay a personal loan, which could give you more time to pay off your debt compared to a payment plan.
However, keep in mind that you’ll pay more in interest on a long-term personal loan compared to a short-term loan.
The IRS says that often the cost of a loan may be is less than the penalties and interest the IRS charges under federal law.
If you decide to take out a personal loan for your tax debt, be sure to consider how much the loan will cost you over time. You can estimate how much you’ll pay for a loan using our personal loan calculator below.
IRS Installment Agreement Don’t Do This!
FAQ
Is an IRS payment plan a good idea?
Is it better to get a loan to pay off IRS debt?
Do IRS payment plans affect your credit?
How much interest does the IRS charge on payment plans?
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.
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.
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.
What is an IRS payment plan?
An IRS payment plan allows you to pay your tax obligation over time, but most payment plans charge fees, penalties and interest rates. Some people prefer to pay their tax obligations by taking out a personal loan, especially if the interest rate on the personal loan is lower than what the IRS might charge.