Should you take out a personal loan to pay your taxes?

In this article, we'll look at whether you should take out a personal loan to pay your taxes. Banks, credit unions, and online lenders offer unsecured personal loans. Loans with fixed interest rates and terms. Lenders set rates based on credit and financial health. Personal loans can be used for anything, even taxes. Borrowers should evaluate their finances before taking a tax loan.

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Can you pay taxes with a personal loan?

If you are short on funds and worried about paying your taxes this year, a personal loan may be enticing. Consider the pros and cons before committing. Personal loans can be cheaper and more consistent than IRS payment plans and other financing options, but taking out a loan with interest and other fees to pay for a predictable annual expense could put you deeper in debt.

Benefits of taking out a personal loan to pay your taxes

Personal loans offer fixed interest rates and repayment durations, making monthly payments predictable. Before taking out a loan, you should know the interest rate and how long you'll have to pay. This consistency enables borrowers to plan ahead and avoid overpaying in interest. One-to-seven-year personal loans are typical.

• Low-interest rates for borrowers with good credit: Good credit applicants can get personal loans at 3% interest. Borrowers with good credit usually get a good rate.

• Quick and simple application process: Personal loan lenders act quickly. Approval takes a few days. Borrowers receive funds within 24–48 hours. Many lenders allow online closing, but some do not.

• No collateral required: Personal loans are unsecured, unlike home equity loans. Personal loans do not put your home or automobile in danger.

• Guaranteed tax return: While debt is dangerous, taxpayers receive tax returns within 21 days of filing, guaranteeing some income to pay off the loan. Paying this debt with your tax refund may be sensible. 2022 tax refunds average $2,323.

Risks of taking out a personal loan to pay your taxes

• High-interest rates: Low-credit borrowers may not qualify for lenders' minimal interest rates. Depending on creditworthiness and financial health, these borrowers could pay an average maximum of 36 percent. Credit-challenged consumers may pay even more than the average 10.82 percent personal loan interest rate.

• Lender fees: Origination, late, application, and other costs vary by lender. Origination fees might be 1–8%. Before applying for a personal loan, know the fees.

• Debt might hurt your credit score: If you make your loan payments on time, you won't hurt your credit score and may even improve it. If you can't pay off your loan or make payments on schedule, your credit score may suffer.

• Could raise your DTI: Your debt-to-income ratio is your debt vs. income. DTI rises when you get a new loan and keep your income. This can hurt your loan and mortgage eligibility.

What happens if you can’t pay your taxes?

Talk to the IRS if you can't pay your taxes. The IRS will deduct the initial amount, fines, and interest from your wages, federal benefits, and future tax returns if you ignore your taxes. Failure to file, pay in full, or dishonor checks result in IRS penalties. On payments over $1,250, the IRS can impose 2% interest.

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Alternatives to using a personal loan to pay taxes

Before taking out a personal loan to cover your taxes this year, examine the following choices:

IRS payment plan

Taxpayers who can't pay in full can get an IRS payment plan. Long-term or 120-day payment plans are available.

120-day full payment

This 6-month tax payment plan may help people who need a little more time. This plan is free from the IRS, but interest and penalties will accrue until your tax debt is paid. If you can pay off the debt before 120 days, do so.

Installments Plans

If you need a longer time to repay the obligation, request an IRS installment agreement. Telling the IRS how much you can pay every month lets them approve or disapprove your request. Pay the agreed-upon sum over time. The setup price is $225, plus interest and penalties. Low-income taxpayers may have this cost waived.

Conclusion

Personal loans may help folks who need tax money this year. Personal loans are a fast and affordable way to receive cash for good to excellent credit customers. However, interest and lending fees increase your loan's cost, and if you can't pay it off, your credit may suffer. Personal loans to pay taxes may harm your finances.

Avoid tax season stress by planning beforehand. If you have problems paying taxes this year, ask your employer to increase your W-4 withholdings for next year or adjust your quarterly estimated taxes if you are self-employed. If that's not enough, start a tax savings account and deposit money throughout the year.