Is Using a Personal Loan for Taxes a Good Idea?

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 didn't 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.

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Can you get a loan for tax debt?

Yes, you can use an unsecured personal loan to pay off tax debt. However, you should consider other options before choosing a personal loan. For example, you might be able to sign up for an IRS payment plan or hardship extension. A 0% APR credit card could also be an option if you can afford to pay the debt off within the promotional period.

What to do if you owe taxes

If you end up with a tax bill, here are a few options to manage the debt:

IRS payment plans

If you can't entirely cover your tax debt, the IRS offers payment plans, also called installment agreements, to help you manage your obligation over time. There are two main types of payment plans.

• Short-term payment plan: This plan allows you to pay off your tax debt in 180 days or less. It's available if you owe less than $100,000 in combined tax, penalties, and interest and have filed all required returns. This plan has no setup fee, but interest and penalties continue to accrue until the balance is paid in full.
• Long-term payment plan (installment agreement): The long-term payment plan gives you up to 72 months to pay back your tax debt. The long-term plan is available if you owe $50,000 or less in combined tax, penalties, and interest. Long-term plans charge $22 to set up a direct debit monthly installment agreement online (the fee is waived for low-income filers) and up to $178 if you apply via other methods. The direct debit option is required for balances of more than $25,000. Like the short-term plan, interest and penalties will continue to accrue until the debt is paid.

To apply for a payment plan, use the IRS Online Payment Agreement application page.

Apply for a hardship extension

If paying taxes will cause undue hardship — meaning you’ll face a substantial financial loss if you pay your taxes by the due date — you might qualify for a short-term or long-term hardship extension. This could give you an extra six to 18 months to pay off your tax debt.

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.

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.

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.

Pros and cons of using a personal loan for tax debts

If you're considering a personal loan for tax debt, be sure to consider the pros and cons first:

Pros of using a personal loan

• Funding can be quick: Some lenders offer fast personal loans that could help you cover your tax bill without delay. If you're approved, you'll generally have the funds within a week — though some lenders also offer next- or even same-day loans.
• Wide variety of repayment terms available: A personal loan could give you ample time to pay off your debt. Repayment terms for personal loans usually range from 1 to 7 years, depending on the lender.
• Options available for less-than-perfect credit: While some lenders require good to excellent credit to qualify for a personal loan, others are willing to work with borrowers who have poor or fair credit. For example, you might be able to get a personal loan with a 600 credit score or lower from several lenders. Just keep in mind that personal loans for bad credit typically come with higher interest rates compared to good credit loans.

Cons of using a personal loan

• Might have to pay fees: Depending on the lender, you might have to pay origination fees, late fees, or other fees — all of which could add to the overall cost of your loan.
• Interest rate depends on your credit score: You might pay more in interest on a personal loan than you would on an IRS payment plan or extension, depending on your credit.
• Requires a credit check: When you apply for a loan, the lender will use a hard credit check to review your credit. This could have a negative impact on your credit score. However, this is generally only temporary, and your score could bounce back within just a few months.

Check Out: Where to Get a Personal Loan

Loan costs vs. IRS penalties and interest

Carefully consider the costs of a personal loan against the potential penalties and interest charged by the IRS.

IRS penalties and interest

• Failure to pay penalty: The IRS charges a failure to pay penalty of 0.5% of the unpaid tax amount for each month or part of a month that the tax remains unpaid, up to a maximum of 25% of your unpaid taxes. If you have an approved installment agreement and filed your return on time, this penalty may be reduced to 0.25% per month or partial month.
• Interest: Interest generally accrues on any unpaid tax from the due date of the return, without any extensions, until the balance is paid in full. The interest rate is determined quarterly and is the federal short-term rate plus 3%. Interest compounds daily, which can significantly increase the total amount owed over time.

Personal loan costs

• Interest rates: Personal loan interest rates vary based on your credit score, income, other debt, and more. Depending on your creditworthiness, you might secure a loan with a lower interest rate than the combined cost of IRS penalties and interest.
• Fees: Some personal loans come with origination fees or other charges that can add to the overall cost of the loan.
• Credit Impact: Applying for a personal loan may affect your credit score, and missing loan payments can have negative consequences for your credit history. However, timely payments can improve your credit.

IRS payment plans vs. personal loans vs. credit cards

As you compare your options, here are several important points to keep in mind:

Here’s what you might expect to pay for each of these options if you had a $5,000 tax bill you wanted to pay off within one year:

• IRS payment plan: If you sign up for a long-term plan by phone, it would cost you $225 in setup fees and potentially $150 in penalties. Keep in mind that interest rates on these plans might fluctuate since rates update quarterly. This means you might pay $300 or more in addition to your tax balance. An IRS payment plan might be a good idea if you can afford to pay off your taxes quickly to avoid racking up penalty charges — such as in six months or less.
• Personal loan: Interest rates on personal loans vary depending on your credit as well as the lender. If you took out a $5,000 personal loan with a 10% interest rate and a one-year term, you’d pay a total of $5,274 over the life of your loan. A personal loan could be a good option if you need a longer period of time to pay your tax debt.
• Credit card: Interest rates on credit cards can be much higher than personal loans. If you charged $5,000 to a credit card with an APR of 16.13%, you’d pay a total of $5,447. A credit card might be a good choice if you have a small tax debt and can use a 0% APR introductory offer to repay your balance quickly while avoiding interest. Just remember that if you can’t pay off your card in time, you could be stuck with substantial interest charges.

If you decide to take out a personal loan, be sure to consider as many lenders as you can to find the right loan for your needs. Credible makes this easy — you can compare your prequalified rates from multiple lenders in two minutes.

What if you can’t pay your taxes?

You may also receive a CP14 notice if you filed your tax return and didn’t pay all the taxes you owe. The notice will include your unpaid taxes, penalties, and interest. Keep in mind that if you fail to both file and pay your taxes, you could face a combined 5% tax penalty per month, up to 25% of your unpaid taxes.

You could also consider using a credit card or personal loan — some lenders offer emergency personal loans that could help you cover your balance quickly.

If you owe money and aren’t sure what to do next, a tax professional can help you navigate the filing and extension process.

Taylor Medine has contributed to the reporting of this article.

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