Should I Get a Loan to Pay Off My Tax Debt?

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Alexandra Tapp
Alexandra Tapp
March 06, 2019

  • If you qualify, you can get a personal loan to pay off your tax debt, but weigh the pros and cons of doing so first.
  • When getting a loan, compare interest rates among several lenders, and pay attention to fees and requirements before making your decision.
  • Other tax relief options include using a credit card, using a home equity line of credit, getting an offer in compromise, or paying it off in installments.

When faced with a tax bill you can’t afford, things can seem bleak. Tax debt isn’t something you want to fall into. And if you don’t pay off your taxes in a timely manner, the Internal Revenue Service (IRS) isn’t very forgiving. Fortunately, you have options — one of which is taking out a personal loan. Here’s how to determine if you should use a loan to pay off your tax debt.

Pros and Cons of Getting a Loan

You can get a personal loan for pretty much anything, including to pay off your taxes. The loan amount can range from $2,000 and $50,000, and you typically have to pay it back within one to seven years. While this seems simple enough, weigh the pros and cons of taking out a loan before doing so.

Pros

  • Lower fees. If you don’t pay your taxes on time, the IRS will hit you with both interest and fees. While you’ll also pay interest on a personal loan, you might not have to pay fees, saving you money in the long run.
  • More time. Because you have several years to pay off a personal loan, it’s often more feasible and less stressful than trying to pay back your tax debt.
  • Good standing with the IRS. A personal loan allows you to pay off your tax debt all at once. You avoid not only the IRS’s interest and fees but also other consequences of being in tax debt, such as seized assets and property liens.

Cons

  • High interest rates. If you don’t have a good credit score, lenders might tack on a higher interest rate than you’d have to pay the IRS. Compare options with various lenders to see which one is lowest. If you do get stuck with a high interest rate on a personal loan, try to pay it off early to avoid owing as much.
  • Hidden fees. Read the fine print about your loan. Some come with additional fees and costs that aren’t immediately apparent.
  • Continued debt. Even though a personal loan will allow you to pay your taxes, don’t forget you still have a debt to pay. Make sure you’re financially able to take on a loan and pay it off in time. Otherwise, you risk lowering your credit score and affecting your ability to get loans in the future.

How to Get a Loan

If it makes sense to use a personal loan to pay off your tax debt, getting the loan is fairly straightforward. First, check your credit score to see if you’re likely to qualify for a good interest rate. Then go to several banks, credit unions, and even online lenders to find out what interest rate you actually qualify for. Compare these to find out which lender offers the best rate. Don’t just compare interest rates, however; also check the annual percentage rate, penalties for prepayment, and origination fees.

Should I Get a Loan to Pay Off My Tax Debt?

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When you decide on a lender, be prepared to present documentation such as your government-issued identification, Social Security number, employment and financial information, and, in some cases, a copy of your tax bill.

Reasons Not to Use a Loan

In some scenarios, it doesn’t make sense to get a personal loan to pay your tax debt. For instance:

  • When you owe more than $50,000. If you own the IRS more than this amount, a loan is not going to cover it in full.
  • When you have a poor credit score. You usually won’t qualify for a loan (or at least not a competitive one) if your credit score is lower than 650.
  • When you can’t afford monthly payments. Don’t take on a loan you can’t afford to pay it back; this will impact your credit score for years to come.

Other Options

If you determine you cannot or do not want to use a personal loan to settle your tax debt, you do have other payment options.

Credit Card

If the amount you owe is less than your card’s limit, and you believe you can pay your balance soon enough to avoid affecting your credit score, putting your tax debt on a credit card might make sense. Credit card interest rates, however, are often higher than that of the IRS. One way around this, if your credit score is high enough, is to open a new credit card with a zero-percent interest promotion. Put your tax payment on a credit card that has a rewards program so you can earn points or cash as you pay it off.

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Offer in Compromise

With an offer in compromise, the IRS agrees to let you pay off your tax debt for less than you owe. You must meet certain criteria, however, to qualify for this arrangement.

Payment Plan

If you owe less than $50,000 on your taxes, the IRS might allow you to pay off that amount in installments for up to six years. This option typically comes with penalties and high interest rates, however.

Home Equity Line of Credit

If you can secure a lower interest rate on a home equity line of credit than what the IRS charges, this option might make sense. In this scenario, you borrow against whatever equity you have in your home. If you default on this line of credit, however, the bank can take possession of your home.

If you’re struggling or unable to pay off your tax debt, you can find relief in several ways. One of those is using a personal loan to pay the IRS. Contact our experts at Solvable to find out if this is the right option for you.

 

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