Tax Day appears dependably every year and, ideally, you don’t end up owing the IRS money. Or if you do, hopefully you can easily pay your taxes. But that’s not always the case. If you do end up owing money to the IRS after filing your taxes, you may have options. Of course, you can dip into your emergency fund, but if you don’t have one yet, there are other options available for borrowing money when you’re in a pinch.
Everyone’s financial situation is different, so there’s not one right answer for covering your tax bill. We’ll go through the pros and cons of using a credit card, an IRS payment plan, or even a personal loan to pay your tax bill.
We should, of course, mention that this article is a broad overview of this matter. It’s always a good idea to consult a licensed tax professional for questions and help with tax-related matters.
Can I Get a Loan to Pay Taxes?
You may be able to get a loan for taxes you owe as long as you can qualify for a loan with the lender you choose. If you can qualify for a loan, you may want to consider whether it’s the right choice for your financial situation or if there may be a different option that works better for you.
What Is a Tax Loan?
A loan for taxes is a personal loan that is used to pay taxes owed to the IRS. The borrower receives the funds in a lump sum and spends the personal loan funds to pay their tax debt.
When looking for a lender that does tax loans, you might consider traditional banks, credit unions, or online lenders, among other financial institutions.
How Does a Tax Loan Work?
If a taxpayer does not have the funds to pay the taxes they owe the IRS, one option to pay the debt is to borrow money to do so. Often, this is in the form of a personal loan, which can be either secured or unsecured. After receiving the loan proceeds, the borrower pays the IRS and begins making regular installment payments to the lender.
How to Qualify for Tax Refund Loan
Qualifying for a tax loan is like qualifying for a personal loan intended to pay for any other expense.
Lenders will look at an applicant’s credit score, employment history, income, other debt, and possibly other lender-specific criteria. Generally, the more creditworthy an applicant is, the more favorable their loan terms and interest rate.
There are a variety of lenders who offer personal loans, so if you don’t qualify at one, you might consider looking at other places to get a personal loan.
Reasons For Tax Refund Loans
If you’re getting a tax refund, you might want the money sooner than the IRS sends it to you. For that reason, you might consider getting a tax refund loan. Also called a refund anticipation loan (RAL), this type of loan is a short-term loan based on the amount of tax refund you are expecting.
Reasons Against Tax Refund Loans
The key word in “tax refund loan” is loan — a debt. There are considerable reasons not to use this option to get an anticipated tax refund amount quickly.
• Typically, there are fees associated with tax refund loans, such as filing fees, application fees, and a fee to cash the loan check, for example.
• Even if your tax refund is smaller than expected, you still have to repay the full loan amount, including interest and any fees charged by the lender.
• If the IRS denies, delays, or garnishes your tax refund to pay another debt, you still owe the RAL — including interest and any fees charged by the lender.
• Interest rates on RALs tend to be high, with APRs sometimes 10 times higher than average credit card interest rates.
• Banks no longer issue RALs, so they typically are offered by payday lenders and other potentially high-interest lenders. Your tax preparer may also be someone who does tax loans in the form of RALs.
Filing your taxes electronically and getting your tax refund, if you’re getting one, via direct deposit generally results in you getting your money faster, often in less than 21 days.
What Happens if You Can’t Pay Your Taxes?
If you owe taxes, you may not have enough cash on hand to make that payment to the IRS, particularly if it’s a large amount. Paying a tax debt in full is ideal, but there are options if you cannot do that.
Options to Pay Tax Debt
IRS Payment Plans
The IRS offers payment plans and the potential for an offer in compromise, which, for those eligible, may allow you to settle your debt for less than you owe if paying in full would create financial hardship. In some instances, you may also be able to temporarily delay collection until your financial situation improves. Depending on your situation, there can also be set-up fees, application fees, interest, and penalties that continue to accrue, increasing the amount you owe until it’s paid in full.
Another option is to charge your tax expense to a credit card. The IRS charges a processing fee, which varies depending on the payment system you choose, if you pay with a credit card.
If you fail to pay off your credit card balance when it’s due, interest will accrue until the balance is paid in full. If you qualify for a credit card with a low- or zero-percent introductory period and pay the full amount before the promotional period ends, you could pay your taxes without incurring any interest charges.
Asking a friend or family member for a loan for taxes is an option some people consider. Borrowing from someone you know generally means you won’t have to undergo a credit check. So if you don’t have great credit but are able to repay a loan, this may be an acceptable option. A close friend or family member who is confident you’ll repay the loan may not charge you interest, or charge a lower percentage rate than you might qualify for with a bank or other lender.
If you do choose to borrow money from friends or family, be clear about expectations from the beginning. For example, setting up a repayment plan could lessen the chance for miscommunication and hurt feelings.
The refund anticipation loan referenced above is quite similar to a payday loan, a borrowing option that often works in the best interest of the lender, not the borrower.
Interest rates on payday loans are much higher than other types of loans, sometimes up to 400% APR. Even using a credit card, with their relatively high-interest rates, is generally a better option than a payday loan.
The repayment term for a payday loan is small — typically, the loan needs to be repaid with the borrower’s next payday. If your tax bill is too large to pay by the time the payday loan is due, the loan may need to be renewed, adding additional fees and accruing more interest on the initial loan balance. This strategy could lead to a cycle of debt that is difficult to break.
Lines of Equity or Credit
Whereas a loan lets you borrow a set amount of money in one lump sum, a line of credit (LOC) gives you a maximum amount of credit from which you can borrow, repay, and borrow again, up to the credit limit. You make at least a minimum payment each month toward your balance due. LOCs can be secured or unsecured — a home equity line of credit (HELOC) is an example of a secured LOC, using your home as collateral.
One advantage to a LOC is the typically lower interest rates they offer compared to credit cards. However, interest rates on a LOC are often variable and can rise over the life of the loan. A drawback to a HELOC is that if you can’t repay the loan, you could lose your home.
You can apply for either a secured or unsecured personal loan, the former requiring collateral to back the loan. A secured loan may have a lower interest rate because the lender can seize the collateralized asset if you default on the loan. Essentially, this lowers the lender’s perceived risk.
It’s a good idea to compare the interest rates on personal loans. They tend to start out lower than credit cards, but they can vary widely depending on your creditworthiness. The average interest rate on a traditional personal loan with a 24-month repayment term was just over 9% in November 2021, but they can be as high as 36%. In addition, some lenders may charge fees such as application or origination fees.
Recommended: Paying Tax on Personal Loans
Pros and Cons of Using a Personal Loan To Pay Taxes
Paying taxes with a common personal loan is another option you might consider. Deciding whether it’s the right choice for your unique financial situation takes some consideration.
|Pros of Paying Taxes With a Personal Loan||Cons of Paying Taxes With a Personal Loan|
|Typically unsecured, so no risk of losing an asset such as a car or home||Some lenders may not lend small amounts|
|Potentially low interest rates if you have good credit||Interest rate may be higher than an IRS repayment plan’s interest rate|
|With a fixed interest rate, monthly payments will be the same over the life of the loan||Some lenders may not allow a personal loan for taxes|
When Tax Day rolls around and you discover that you owe taxes to the IRS, it’s a good idea to consider multiple options to settle the bill. If you don’t have enough money in your bank account to pay your tax bill, you might turn to an IRS repayment plan, your credit cards, a loan from a loved one, or a line of credit.
If none of those options are available to you, you may want to consider an unsecured personal loan for taxes. SoFi Personal Loans have competitive, fixed rates with a variety of terms to fit different budget needs. It takes just one minute to check your rate, and it won’t hurt your credit score.*
Can I get a loan to pay taxes?
Yes, a personal loan can be used to pay taxes in most cases. Applicants must meet qualification requirements like any other personal loan, which typically include a credit check, employment and income verification, and other criteria.
What is a tax loan?
A tax loan is a personal loan used to pay taxes owed.
How does a tax loan work?
Tax loans are personal loans, either secured or unsecured. The borrower uses the loan proceeds to pay the IRS and then makes loan payments to the lender.
*Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. However, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit pull and may affect your credit.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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