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Is Using a Personal Loan for Taxes a Good Idea?

If you’re facing a big tax bill, a personal loan may let you avoid costly IRS penalties and interest.

Author
By Jared Hughes

Written by

Jared Hughes

Freelance writer, Credible

Jared Hughes has over eight years of experience in personal finance. He has provided insight to New York Post and and NewsBreak.

Edited by Savannah Plasch

Written by

Savannah Plasch

Savannah is an Editorial Assistant at Credible. She received her BA in English from UCLA and an MFA in Creative Writing from Queens University of Charlotte.

Reviewed by Meredith Mangan

Written by

Meredith Mangan

Senior editor, Fox Money

Meredith Mangan is a senior editor at Fox Money and expert on personal loans.

Updated May 2, 2024

Editorial disclosure: Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”

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Credible Takeaways

  • If you have tax debt, you can use an unsecured personal loan to pay it off.
  • Other options include a payment plan through the IRS or paying with a credit card.
  • Each option has different fees and interest rates, so it’s important to research which is right for you.

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.

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:

Set up a payment plan with the IRS

Depending on how much you owe in taxes, you might be able to set up a short- or long-term payment plan through the IRS. Keep in mind that while there’s no fee to set up a short-term plan, long-term plans charge anywhere from $31 to $225, depending on how you apply for the plan.

Also note that interest and some penalties will continue to accrue until your balance is paid off.

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Tip

If you’re a low-income taxpayer who signs up for a long-term payment plan, you might qualify for a waiver or reimbursement of the fees charged for setting up the plan.

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.

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Keep in mind

While you won’t owe interest on any taxes you pay before the due date, interest will accrue on the amount you pay after the due date. You might also be charged penalty fees if you don’t pay your balance off by the end of the extension.

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.

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Good to know

The IRS says that often the cost of a loan may be is less than the penalties and interest the IRS charges under federal law.

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.

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Good to know

IRS payment processors typically charge a fee of up to 1.98% for using a credit card. If you owe $2,500, for example, you could end up with a fee of $49.50 if you pay it with a credit card.

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 prepayment penalties — 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

IRS payment plans vs. personal loans vs. credit cards

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

APR
Term
Fees
Penalties
IRS payment plan
Federal short-term rate plus 3% (this rate changes quarterly)
Short-term plan: Up to 120 days
Long-term plan: Up to 6 years (depending on what you owe)
Short-term plan: $0
Long-term plan: $31 to $225* (depending on whether you set up the plan online, by phone, or in person)
*Low-income taxpayers might qualify for a waiver or reimbursement of setup fees
0.25% of the tax due per month
Personal loan
Varies
1 to 7 years (depending on the lender)
Might charge:
Origination fees
Late fees
Prepayment penalties
None, as long as monthly payments are made on time and in full
Credit card
Varies (some cards have a 0% APR introductory period)
(credit cards have no set payoff date)
Might charge:
Annual fees
Late fees
Over-limit fees penalties
Cash advance fees
None, as long as:
Monthly payments are made on time and in full
You don’t spend more than your limit

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.

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Tip

Filing and then applying for an extension or payment plan is generally a better move than not filing at all. This way, you can avoid paying excessive penalties and interest.

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.

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Personal loan lenders

If you decide to take out a personal loan for tax debt, be sure to consider as many lenders as possible to find the right loan for you.

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