Tax Relief

Taking a Loan to Pay Taxes? Here’s What You Need To Know

Sometimes, tax season is no big deal. You file, you get your tax return, then you’re done for another year. But sometimes, it can be much more complicated than that, especially if the IRS comes knocking on your door.

If dealing with the tax arm of the federal government makes you nervous, you’re not alone. Many people fret over the thought of dealing with the IRS when it comes to taxes, back taxes, loans of all shapes and sizes, and tax information in general.

If you find yourself owing money due to your tax bill, personal loan, or any number of other reasons, then you know that you’ll need to pay on time. If you don’t have the funds available to pay right away, the IRS isn’t very forgiving. Owing money can result in some long-term consequences and can show on your credit report for years. You do have some options, however, which include getting a loan to pay your tax bill. This article will break down various ways to help you pay your tax debt and how to effectively maneuver around the dreaded IRS.

When you owe the IRS money from a tax bill

When you owe money to the federal government, the worst thing you can do is ignore it or not file a tax return. Even if you can’t pay the taxes due, you still need to send your return in on time to avoid any additional penalties or worse. Owing back taxes, which are taxes from previous years that were never fully paid, can happen come tax season and can be a problem for many families.

Failure to file taxes when you owe money carries a steep penalty. This means an extra 5% added each month up to a maximum 25% penalty, and failure to pay these penalties can result in far worse consequences.

The long-term consequences of not paying your taxes can be severe. The IRS has the authority to garnish your wages and put a tax lien on your property. It can even seize some of your assets to pay that debt. A tax lien is the government’s legal claim against your property and can be devastating to your personal credit scores for years to come.

Your first order of business should be to file your return. You can easily find the right service provider for you with a quick web search of available options in your area. Once you filed your taxes, then you can worry about how you’re going to pay your tax bill.

If you owe a lot of money, it can help to have a tax relief company on your side. The best tax relief firms have tax lawyers, CPAs, and enrolled agents on staff, provide a money-back guarantee and charge competitive rates. Check out which tax relief company is the best fit for you.

Getting a personal loan to pay taxes

Having delinquent taxes is not something you want hanging over your head. In most cases, you have three options to pay off this debt if you don’t have the cash on hand.

Options To Pay Off Taxes

  • An agreement directly with the IRS
  • Paying taxes with credit cards
  • Using a personal loan to pay taxes

Pay your taxes with an IRS arrangement

The first option is to pay your tax through a direct agreement with the IRS. This often comes in the form of an installment plan. Taxpayers who don’t owe that much and have a steady source of income can set up a payment plan and have the debt cleared up in a matter of months.

If the tax burden keeps you from paying your monthly living expenses (rent, food, gas), you might even be able to get those payments delayed for a short period until you can figure out your financial situation before starting your payment plan.

The procedure to get an installment agreement in place varies depending on your circumstances. For example, if you’ve filed and paid your tax bills up until now, and your current bill is $10,000 or less, the IRS will often grant an installment plan even if you have the money on hand to pay.

What is the interest rate on an IRS installment agreement?

Entering into an IRS installment agreement can a valid solution to your tax problems, but it isn’t always the cheapest. An IRS installment agreement is one of the payment plans offered to taxpayers in trouble with their taxes. The cost of an installment agreement varies depending on what penalty fees the IRS charges you. In many cases, you are better off taking out a loan to pay taxes that are owed to the IRS or even multiple personal loans if necessary.

If you owe $50,000 or less, no matter what your past tax situation was, you simply need to request an installment agreement online and pay the applicable fee. Tax payments to the IRS are subject to fees and interest, so if you choose this option, consider the penalties and interest that will be added to your tax bill. All things considered, expect to pay an 8% to 10% APR when you opt for an installment agreement.

The penalties and interest added to your tax bill with these agreements can be more expensive than getting a loan to pay taxes owed, so if you find yourself in this situation, you should consider all of your options before deciding what works best for you. And, even with one of these installment agreements in place, the IRS still has the option to file tax liens against you until your payment terms are complete.

The IRS actually says the following on its tax payment options advice page:

You should consider financing the full payment of your tax liability through loans, such as a home equity loan from a financial institution or a credit card. The interest rate and any applicable fees charged by a bank or credit card company may be lower than the combination of interest and penalties set by the Internal Revenue Code (IRS Tax payment options – Topic 202.)

That doesn’t mean a personal loan to pay off your tax debt is always the best course of action. In some cases, the IRS payment plans offer a much better interest rate and terms than private lenders. That’s why you must check your options and calculate which one is the best deal for your household, even if that means taking a personal loan to pay your taxes. Here are some additional options you can consider.

Using credit cards to pay your taxes

In most cases, paying your back taxes with a credit card is a bad idea. The interest rates on most credit cards are much higher than what the IRS charges. However, if you have access to a credit card with a 0% annual percentage rate (APR) introductory rate, you could save money by financing the debt with the credit card compared to taking out one or multiple loans. The key is to pay off the credit card debt before the 0% APR intro rate ends. Otherwise, you could be on the hook for an interest rate that ranges from 15% to 29%, depending on the card. This is partially why taking out a loan can be a better option for many people.

Another benefit to using a credit card is that you can sometimes earn rewards. However, the rewards are typically offset by the IRS credit card processing fee (1.87% to 2.25%). If you can find a credit card that can offer you a 0% APR and has some high percentage rewards to offset this processing fee, then this could be an option worth considering. Another thing to note before doing this is that adding a large balance to your credit cards can also negatively affect your credit score. However, taking out a loan or multiple loans can do this as well, so this might be unavoidable depending on your situation.

Home equity loans vs. IRS installment agreements

If you own a home and have good credit, you may qualify for various home equity loans or a home equity line of credit (HELOC) that has lower interest rates than what the IRS charges in interest and penalty fees. These types of loans also typically offer lower than that of credit cards, so taking out a home equity loan can be a great way to pay off your debt. Of course, this is only an option for people who have substantial equity in their homes already built. In other words, the market value of your home has to be higher than the balance on your mortgage to qualify for a home equity loan or line of credit. If you’re considering taking out a loan to pay your taxes bill on, then a HELOC could be the way to go.

Although financing your tax debt with a home equity loan has its advantages, it’s not something you should rush into. Remember that in opening this type of loan or line of credit, you are putting up your home as collateral. If you default on the loan, the lender could foreclose on your home to cover the debt. If this idea scares you, then utilizing personal loans or one of the IRS payment plans could be a better option for you.

Paying your taxes with a personal loan

Another option is to pay off your IRS tax debt with a personal loan. When it comes to using a personal loan to pay taxes, borrowing money from a private lender or a credit union only makes sense if you qualify for a lower rate than the IRS interest plus penalty. The better your credit score, the greater your chances of qualifying for a personal loan with a low-interest rate.

Before taking out this type of loan, it is important to know where your credit stands. If you don’t know your current credit score or where to find your credit report, you can check it for free here.

There are several benefits of using a personal loan to pay taxes. When you use a personal loan to pay off your tax bill in a lump sum, you don’t have to worry about penalties and interest from the IRS. You can also sleep better knowing that no one is going to garnish your wages, seize your assets, or file a lien against your property for failure to pay your tax payments. All you will need to worry about is paying back the private loan itself on time to avoid any additional fees or penalties.

More often than not, personal loans will have competitive interest rates and no prepayment penalties. This means that if you decided to use a personal loan to pay off your tax debt, you could pay off the loan as quickly as you want without paying any additional fees, which is why a personal loan is a route that many people choose to go with.

You should also keep in mind the loan amounts you would need to take out, as rates can be subject to change depending on how much money you will be asking for your loan.

Using a personal loan can be challenging, as different personal loans come with different rates, fees, and requirements. Make sure to check out what the best personal loan is for you to ensure that you choose the best loan option. Also, constantly checking your personal loan offers, as these offers can come and go and change over time.

Where to get a personal loan to pay taxes

You can get a personal loan to pay your taxes from major banks, credit unions, and many online lenders. Borrowers now find some of the most competitive rates and fastest funding for personal loans with online marketplace lenders and online lenders. This does depend on the loan amount, so not all offers will apply to you. Here are some examples of lenders that may offer personal loans that are cheaper than borrowing from the IRS with an installment agreement.

Something to keep in mind is only borrowers with excellent credit qualify for a low enough interest to justify paying your tax debt with a personal loan.

How to compare lenders

When you compare personal loan lenders, there are several things that you need to keep in mind to make sure you’re looking at the right offers for you. SuperMoney makes it easy to compare personal loan lenders by providing free expert and consumer reviews. Below are also a few things that you want to keep in mind when comparing offers.

Interest Rate and APR

When you get a loan, it’s going to come with an interest rate, which is a percentage of the total amount that you are borrowing and has a large impact on the cost of the loan. Sometimes you will also see the annual percentage rate, or APR, in your loan offer. This includes the interest rate on top of the loan fees. This ultimately helps give the borrower a better sense of the loan’s true cost.

Another item that you will want to pay attention to is if the interest type is fixed rate or variable rate. A fixed interest rate will stay the same throughout the life of the loan, where a variable rate can change over time and possibly increase during the life of your loan. The better your credit, the better rates you will get in your loan offer.

Loan Terms

Different lenders may have different offers for their loans. Personal loan terms typically range anywhere from six months to five years, but certain lenders may offer extended loan periods if you quality. Keep in mind that longer isn’t always better, as a longer loan life could result in paying more interest over the life of the loan even if the monthly payments are lower.

Fees

Before signing any offer for a loan, you will want to ask about the lender fees associated with the loan. They are often hidden and can add up quickly. A few common fees are:

Origination fee

This is an upfront fee lenders charge for processing your loan. These can range anywhere from 1%-8% and are typically charged upfront.

Prepayment penalty

Lenders may charge you a penalty if you pay your loan off early to ensure that they get all of their money. If you expect to get a cash windfall in the future and want to use it to pay off your loan early, you will want to check to see whether a fee will be applied before doing so.

Late Payment fee

If you fail to make payments on time, you will want to know if your lender charges a late fee. This can often be avoided by setting your bills to autopay.

Monthly and Total Payments

Your monthly and total payments are the amounts that you will pay until the loan is paid off in full. You will want to make sure that the monthly payment fits well enough into your budget so that you can still afford other bills like auto loans while paying off the loan. Below is a simple graphic that shows how different interest rates and loan durations can affect your monthly payment.

Bottom Line

At the end of the day, if you find yourself caught under scrutiny by the IRS, there are products and tools you can use to successfully pay off your debt to the IRS.