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Pros and Cons of Using a Personal Loan to Pay Taxes
Tax season can bring a sizable refund that you could use to build your emergency fund, pay off debt or tackle those home improvements you’ve been putting off. On the other hand, you may end up owing money to the IRS instead.
If you’re facing a tax bill, you may consider using a personal loan to pay it off. But before applying for a personal loan to pay taxes, there are some key pros and cons to keep in mind.
Can you use a personal loan to pay taxes?
The short answer is yes, you can. When you owe taxes, either to the IRS or to your state tax authority, you have several ways to make good on the bill. For example, you could use any of the following to pay outstanding taxes:
- Cash from savings
- Credit cards
- Personal loans
- IRS payment plan
Drawing on cash may not be an option if your emergency fund isn’t enough to cover what’s owed. While credit cards can be a convenient way to pay taxes, it can mean paying a sizable processing fee to the IRS or your state tax agency. And if your card has a high APR it could prove an expensive option for paying taxes.
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IRS payment plans can let you pay off tax bills over time but interest and penalties can accrue continuously. Personal loans can provide you with a lump sum of money to pay off outstanding tax bills, without having to drain your cash reserves or resort to a high interest credit card.
Pros of using a personal loan to pay taxes
There are several advantages of using a personal loan to pay your tax bill. As you explore options for paying taxes, here are some of the best reasons to consider a personal loan:
- Owe a lender, not the IRS. Taking out a personal loan to pay taxes means you don’t owe money directly to the IRS. That may appeal to you if you’d rather not be in the federal government’s debt.
- Secure low interest rates. Personal loans can offer low interest rates to borrowers with the best credit scores. Using a personal loan to pay taxes versus a credit card could save money on interest.
- No processing fee. The IRS uses several credit card processors to accept credit and debit card payments, all of which charge a fee. When you use a personal loan to pay taxes, you could deposit the proceeds into your bank account and write a check, allowing you to bypass the fee.
- Predictable repayment. Personal loans can offer predictability when it comes to your monthly loan payment and payment schedule. That can make it easier to budget your money and pay back what you borrowed to cover a tax bill.
Cons of using personal loans to pay taxes
While a personal loan can help to cover a funding gap when you have taxes to pay, there are some potential downsides to keep in mind. Here are the chief cons to be aware of:
- Loan amounts. If you owe a large tax bill to the IRS or state, it’s possible that one personal loan by itself may not be enough to cover what’s owed. You may need to take out multiple loans, which means having to make multiple payments each month.
- Higher rates if you have poor credit. Your credit scores can determine what you pay in interest for a personal loan. If you don’t have great credit, then taking out a personal loan could mean agreeing to a higher interest rate.
- Loan fees. While you won’t pay a processing fee to use personal loan proceeds when paying taxes by check, there are other fees you may contend with. For example, some personal loan lenders charge origination fees or prepayment penalties.
- Debt. Using a personal loan to pay taxes essentially means exchanging one type of debt to another. And if you fall behind on personal loan payments that could put your credit score at risk.
How to get a personal loan to pay taxes
If you’ve weighed the options and believe a personal loan is the best way to pay your tax bill, you can start shopping for loan options.
When comparing personal loans to pay taxes, pay attention to:
- Minimum and maximum loan amounts
- Loan fees, including origination fees
- Repayment terms
- Estimated monthly payment
- Interest rate and APR
Also, consider the minimum credit score and income requirements needed to qualify for a personal loan. Again, the higher your credit score is, the better for getting easier approval and the best interest rates.
RELATED: What Credit Score Is Needed for a Personal Loan?
Once you’re approved for a personal loan to pay taxes, don’t delay in making payment to the IRS or your state tax agency. Failing to pay taxes by the filing deadline can trigger penalties and interest, adding to what you owe.
Rebecca Lake is a freelance writer specializing in personal finance, credit and debt. She’s a contributor to U.S. News and World Report, Forbes Advisor and The Balance and her work has appeared online at CreditCards.com, MyBankTracker, Money-Rates.com and dozens of other top publications.