An expensive income tax bill can cause a lot of financial stress, especially if it’s unexpected.
If you don’t have enough savings, you can pay your taxes with a personal loan, but you may have cheaper options.
Can you use a personal loan to pay taxes?
You can use a personal loan for most purposes, including paying a tax bill. Some lenders prohibit using a personal loan for certain expenses, like higher education costs or investments, but taxes generally aren’t among them.
But should you use a personal loan to pay taxes?
Using a personal loan to pay taxes can be a good option if you need to spread out a large tax bill over time and you qualify for a low annual percentage rate (APR).
But you'll need a high credit score to get a low rate. If your credit is fair or bad (generally scores below 690), a personal loan will cost more than most alternatives, including IRS installment agreements.
Using a personal loan to pay taxes also doesn't make sense if you only owe a few hundred dollars, since loan amounts typically start around $1,000.
Pros and cons of using a personal loan to pay taxes
Pros
Same- or next-day funding may be available. Many lenders provide an instant decision if you apply online. Some lenders offer same- or next-day funding, allowing you to settle your tax bill quickly.
Avoid IRS penalties. Paying off your full tax bill with a personal loan means you can avoid additional IRS interest and penalty charges. (We explain those penalties below.)
Predictable payments: With a personal loan, you’ll have a fixed interest rate and monthly payment. Alternatives like IRS plans and credit cards have variable rates that can make the cost of paying off your tax bill less predictable.
Cons
Approval is based on creditworthiness and income. Lenders require a hard credit check as part of their application and consider factors like your income and total debt to qualify you.
APRs may be higher. Personal loan APRs range from 6% to 36%, and even those with excellent credit may receive rates around 15%. Alternatives, like IRS payment plans or 0% APR credit cards, may be cheaper ways to pay a tax bill.
Possible origination fees. Some lenders charge an upfront origination fee up to 10% of the loan amount that’s typically deducted from loan funds. You may need to borrow more to cover your full tax bill if your lender charges this fee.
What happens if you can’t pay your income tax bill
The IRS charges interest and penalty fees if you don’t pay your taxes by the deadline.
Interest: The IRS charges interest on your unpaid tax bill equal to the federal short-term rate plus 3 percentage points. The rate is currently set at 7%.
Fees if you file but pay late: The failure-to-pay penalty is initially 0.5% of the unpaid amount per month, though it can increase to 1% if you don’t respond to an IRS levy. The IRS caps this penalty fee at 25% of your unpaid taxes.
Fees if you don’t file: If you owe taxes but don’t file your return at all, you’ll be charged 5% of the amount owed monthly, up to a maximum of 25%. If you’re over 60 days late, you could also owe a late-filing penalty of either $525 or 100% of the amount owed, whichever is less.
If the IRS charges both failure-to-pay and failure-to-file fees, the failure-to-file penalty gets reduced by 0.5 percentage points. It maxes out after five months, but you’ll continue to be charged the failure-to-pay fee until you pay your tax bill.
After a prolonged period, the IRS can take more severe actions, including wage garnishment, bank account seizure and property seizure.
» MORE: 10 ways to pay your taxes
Alternatives to using a personal loan to pay taxes
IRS payment plan
An IRS payment plan is a deal you make with the IRS to pay your tax bill over time.
Short-term IRS payment plans are for taxpayers who owe less than $100,000 and can pay the balance in 180 days.
Long-term IRS payment plans are for those who owe less than $50,000 but need more than 180 days to settle the bill.
Requirements for IRS payment plans
To enroll in an IRS payment plan, you need to fill out the online application or contact the IRS directly. Applying doesn’t require a credit check or income verification, but you’ll need to have filed all required tax returns if you’re requesting an installment agreement.
There are multiple ways to make payments, including via a bank account, debit card, credit card, check or money order.
Benefits and downsides of IRS payment plans
IRS payment plans let you spread the amount you owe into smaller payments without involving a third-party lender. Interest and penalties on your unpaid tax bill still accrue while you’re on an IRS payment plan. However, if you file on time, the late-payment penalty drops from 0.5% per month to 0.25% per month when you’re enrolled in a payment plan.
There’s also a setup fee to apply for a long-term plan: $29 if you enroll in an automatic withdrawal plan or $69 if you don’t. Fees may be higher if you apply by phone, mail or in person instead of online. Low-income taxpayers may get some or all of those fees waived.
Unlike payments on a loan or credit card, payments made through an IRS agreement aren’t reported to the credit bureaus, so they won’t directly impact your credit score. But if you don’t make payments as agreed, the IRS can terminate the agreement and resume collections.
0% APR credit card
A 0% APR credit card may be an affordable way to pay an expensive tax bill over several months, as long as you pay the balance before the card’s zero-interest promotional period ends — typically the first 15 to 21 months.
Requirements for 0% APR credit cards
Most credit card companies require you to have good credit (a score of 690 or higher) to qualify for a 0% APR credit card. An issuer may also consider factors like income and employment status.
Benefits and downsides of 0% APR credit cards
Using a 0% APR credit card can be one of the least expensive ways to cover a tax bill, provided that you pay off the entire bill before the promotional period ends. Whatever balance you carry over after that period can be subject to a double-digit interest rate.
You’ll also have to pay a processing fee — typically less than 3% of the amount owed — if you use a credit card to pay your tax bill.
» MORE: Best 0% APR credit cards
401(k) loan
If you have a retirement account through your employer, you could consider getting a 401(k) loan to cover the tax bill. You can typically borrow up to half of your vested account balance or $50,000, whichever is less, for up to five years. If your 401(k) has less than $10,000, your plan may allow you to borrow up to your full balance.
Requirements for 401(k) loans
To take out a 401(k) loan that would fully cover your tax bill, your vested balance usually must be at least double that amount, since you can only borrow up to half of your vested account balance unless you have less than $10,000. You must be able to make quarterly payments.
Benefits and downsides of 401(k) loans
A 401(k) loan can be a quick way to access needed funds. There’s typically no credit check, and your APR is likely to be lower than with a personal loan. Also, the interest you pay goes back into your retirement account.
However, if you lose your job or leave the company, you may have to repay your loan immediately or be subject to early withdrawal penalties. You’ll also hinder potential growth of your nest egg if you take money out to cover your tax bill.
Home equity loan or line of credit
A home equity loan and a home equity line of credit (HELOC) are both types of secured financing where you use your home as collateral.
A home equity loan is a type of installment loan where you get a lump sum of money at a fixed interest rate. Monthly payments are consistent throughout the length of your loan term.
A HELOC is a type of revolving credit you can continuously draw upon until you reach your credit limit. Interest rates and monthly payments are usually variable.
Requirements for home equity financing
To qualify for home equity financing, you need to be a homeowner. You usually need an appraisal to confirm the current value of your home. You also must meet a lender's credit and income requirements.
Benefits and downsides of home equity financing
Home equity financing often comes with lower interest rates than unsecured loans. But if you default on your home equity loan or HELOC, you could lose your home. It also takes more time to get money with home equity financing, because the underwriting process includes more steps, like a home appraisal.
» MORE: Compare home equity loans
Family loan
If you have a trusted family member who can afford to help you out, consider asking for a family loan. This borrowing method may feel informal and it can be awkward to ask loved ones for money, but this can be a quick, low-cost way to get the funds you need to cover a tax bill.
Requirements for a family loan
A family loan doesn’t have the strict requirements that a formal lender may have. This makes family loans ideal for people who may not have a good credit score or meet other requirements from a financial institution.
Even though a family loan is less formal, it’s a good idea to draw up a loan agreement so both parties are clear on how the money will be repaid.
Benefits and downsides of a family loan
A family loan can come with little to no interest, making it a cheap way to borrow money. It can also be a quick way to borrow if your loved one has an easily accessible source of cash.
The big risk in using a family loan is damaging your relationship with your loved one if you aren’t able to pay back the money. Make sure you have a plan for making payments and discuss in advance what would happen if you aren’t able to pay.
» MORE: The best ways to borrow money
Tips for using a personal loan to pay taxes
Here are some things to consider if you’re thinking about getting a personal loan to pay your income tax bill.
Determine how much you need to borrow. You’ll want to borrow enough to cover your unpaid tax bill, plus any accrued interest and penalties. If your lender charges an origination fee, make sure you factor in the additional cost when requesting your loan amount.
Pre-qualify with multiple lenders. Pre-qualifying for a personal loan typically only involves a soft credit check, which means there’s no credit score impact. When you pre-qualify, you get to see your likelihood for loan approval and a preview of your estimated rates and terms. Lenders will often share your estimated monthly payment amount when you pre-qualify, but you can also use a personal loan calculator to estimate the monthly cost.
Compare personal loan offers to alternatives. Once you have personal loan offers, compare them against your alternatives. Check whether another option, like an IRS payment plan or a 0% APR credit card, could cost less overall.
Make sure you can afford the monthly payments. If you decide to use a personal loan for taxes, make sure your monthly payment fits into your budget before you accept the offer. Also, consider consulting with a tax professional about whether you’re withholding enough to cover your tax obligations going forward.
Finally, the IRS failure-to-file penalty is 10 times more expensive than the failure-to-pay fee. If you can’t afford your tax bill, be sure to file your return by the deadline even if you need more time to figure out how to pay it.
Tips for using a personal loan to pay taxes
Here are some things to consider if you’re thinking about getting a personal loan to pay your income tax bill.
Determine how much you need to borrow. You’ll want to borrow enough to cover your unpaid tax bill, plus any accrued interest and penalties. If your lender charges an origination fee, make sure you factor in the additional cost when requesting your loan amount.
Pre-qualify with multiple lenders. Pre-qualifying for a personal loan typically only involves a soft credit check, which means there’s no credit score impact. When you pre-qualify, you get to see your likelihood for loan approval and a preview of your estimated rates and terms. Lenders will often share your estimated monthly payment amount when you pre-qualify, but you can also use a personal loan calculator to estimate the monthly cost.
Compare personal loan offers to alternatives. Once you have personal loan offers, compare them against your alternatives. Check whether another option, like an IRS payment plan or a 0% APR credit card, could cost less overall.
Make sure you can afford the monthly payments. If you decide to use a personal loan for taxes, make sure your monthly payment fits into your budget before you accept the offer. Also, consider consulting with a tax professional about whether you’re withholding enough to cover your tax obligations going forward.
Finally, the IRS failure-to-file penalty is 10 times more expensive than the failure-to-pay fee. If you can’t afford your tax bill, be sure to file your return by the deadline even if you need more time to figure out how to pay it.
