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When faced with a tax bill you can’t afford, things can seem bleak. Back taxes aren’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 back taxes.
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.
If it makes sense to use a personal loan to pay off your back taxes, 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.
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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.
In some scenarios, it doesn’t make sense to get a personal loan to pay your back taxes. For instance:
If you determine you cannot or do not want to use a personal loan to settle your back taxes, you do have other payment options.
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 back taxes 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.
With an offer in compromise, the IRS agrees to let you pay off your back taxes for less than you owe. You must meet certain criteria, however, to qualify for this arrangement.
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.
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 back taxes, you can find assistance 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.