How to Use a Personal Loan to Pay Your Tax Bill

Written by Erik J Martin

Financial Expert

Edited by Kristin Marino

Managing Editor

You’ve completed your tax return and learned that you owe the IRS money. Problem is, the amount owed is beyond what you can afford. Don’t panic: You have options to pay your tax bill. One of them is getting a personal loan.

A new personal loan can push the IRS off your back. You can get the loan money quickly and pay it back over time. This could be a better choice than getting a cash advance on your credit card or other means. Find out what is involved with getting a personal loan and explore your options.

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What Happens if You Don’t File Taxes on Time?

You may be thinking: Okay, I owe the IRS. But I can’t afford the tax bill right now. Why don’t I just file my taxes and pay my bill later, when I have the cash saved up?

This is not a smart strategy. That’s because if you miss the tax filing deadline (April 15 most years), the IRS will penalize you by assessing a failure-to-file penalty. You’ll be charged a penalty of 5% of your unpaid taxes for every month your tax return is late, up to a maximum penalty of 25%.

But it gets a little more complicated. If you file 30 days late and a 5% penalty applies. If you’re 60 days late, you’ll pay 5% of your remaining tax liability as well as a minimum penalty of 100% of your tax liability or $210, whichever is lesser. Go 90 days late and another 5% penalty kicks in. Fail to file after 120 days and yet another 5% penalty applies. Miss the deadline by five months and that max penalty of 25% will apply.

Note that the IRS will waive these penalties if you can prove a hardship. If you’re a military service member or a disaster victim, for example, you may be given more time to file and pay your tax bill.

How Does the IRS Installment Plan Work?

Think you won’t be able to pay on time? You can set up a payment plan with the IRS. A short- or long-term installment plan can permit you to pay back what you owe over a particular period of time. Be aware, however, that you’ll likely still have to pay interest and penalties for being late to begin with.

You can opt for a short-term installment plan that pays off the bill in 120 days or less. There’s no fee with this option, and you can pay via check, credit/debit card, or money order or via automatic checking account withdrawals. With a long-term installment plan (you can pay for up to 72 months), it costs $31 to $107 to apply (online vs. phone/mail/in-person, respectively) if you want to pay using automatic withdrawals. Paying through another method costs $149 to $225 to apply.

Note that there may be additional fees and conditions.

How Do You Pay the IRS With a Personal Loan?

You can apply for a personal loan from a bank, credit union, or other lender. The good news is that the interest charged on a personal loan can be a lot less than you’d pay using a credit card. The Federal Reserve reported that the average interest rate on a 24-month personal loan in 2019 was 10.32%. Compare that to 15.05% charged, on average, by credit cards in 2019.

The process of using a personal loan to pay your tax bill is simple. First, you complete a personal loan application. The lender will analyze it and check your credit. Assuming you get approved, it’s possible to receive the money fast – even the next day, depending on the lender. You can deposit the money into your checking account and either mail a check to the IRS or choose Direct Pay tied to your bank account. Then, you’ll begin making monthly payments on your personal loan until you pay off the loan in full.

Normally, you can use a personal loan to pay for anything. But some lenders have different rules. So before applying for a personal loan, check to see that the lender will permit you to use personal loan money toward a tax bill owed.

Can You Pay the IRS With a Credit Card?

If you prefer paying via plastic, you’re in luck. The IRS allows payment by credit or debit card. This can be done online, by phone, or with a mobile device. Fortunately, the IRS won’t charge you a fee for this service. But the card you use might, so check the fine print carefully if you plan to use this option.

It may be faster to pay the IRS with a credit card and then clear the credit card balance with a personal loan. Why would you do this? Because personal loan interest rates are usually lower, and because they are fixed. You know exactly what your payments will be and when you’ll be free of your tax debt.

Can You Pay the IRS With a Home Equity Loan?

Nervous about using a credit card or taking out a personal loan? If you own a home and have built up equity, you have a good alternative strategy: Tap into that equity by taking out a home equity loan or home equity line of credit (HELOC). In fact, the IRS even suggests this option in its Tax Topic 202. Keep in mind that this option is more appropriate for larger amounts: home equity loans are mortgages, which means even if their rates are lower, their setup costs can be high.

Consider that fixed interest rates on a home equity loan have averaged around 6% or less recently. The fixed rate is a bit north of 6% for a HELOC lately. If you qualify for either, that means you can pay a lot less in interest than you would for a personal loan or credit card.

As with a personal loan, you can apply for a home equity loan or HELOC through a traditional bank, credit union, online lenders, and other financial institutions. You fill out an application online or at a brick-and-mortar location; the lender reviews it and runs a hard check on your credit. Be prepared to wait a bit longer for your cash, however. It can take two to four weeks from the time you apply to the time you close.

What Happens if You Don’t Pay the IRS?

Is all this effort to pay the IRS worth the trouble? You bet. That’s because ignoring your tax bill is a bad strategy that will cost you in the long run.

First, interest will begin to accrue on any unpaid tax from the due date of the return until the date of payment in full. The IRS determines this interest rate quarterly; it’s the federal short-term rate plus 3%, and the interest will compound daily.

Then, there’s a failure-to-pay penalty to worry about. This penalty is assessed if you file a return but don’t pay the tax you owe on time. The penalty amounts to .5% for each month, or part of a month, up to a ceiling of 25%, of the amount of tax that remains unpaid from the due date of the return until the tax is paid in full.

And don’t forget about the failure-to-file penalty already covered earlier in this article. Put together, these penalties and interest charges can cripple your finances. Having unpaid IRS bills can also hurt your credit, making it hard to get approved for future financing.

Make no mistake: The IRS isn’t going to let you off the hook. And when you finally pay your taxes, note that the IRS will apply payments to the tax owed first, followed by penalties owed, followed by interest owed.

The moral of the story? Pay your tax bill on time. If you lack the cash, pursue a personal loan, home equity loan, HELOC, or credit card payment.

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