Pros and Cons of Taking Out Personal Loans to Pay for IRS Debt

Owing money to the IRS is very unpleasant. The notices keep coming, the penalties and interest accumulate, and you’re concerned the IRS will take your paycheck or empty your bank account. You want this tax debt burden removed as soon as possible.

A personal loan seems like the type of solution that could take care of your IRS tab quickly. But is borrowing from your local bank or an online lender the right move? Or will it just worsen your situation?

Before you finalize a personal loan to pay for IRS debt, let’s discuss the pros, cons, and alternatives so you can make the best financial decision.

The Issue with IRS Debt

Before evaluating whether personal loans are prudent for IRS debt, let’s explain where this troublesome debt originates and how it operates.

You likely angered the IRS by:

• Not paying all the taxes you are required to pay
• Completely missing the tax return deadline
• Miscalculating and underpaying

When this occurs, the IRS begins adding penalties and exorbitant interest charges to your tax bill until you pay it off. They’ll also start sending threatening letters stating they will take forceful collection actions if you don’t pay immediately.

That could include taking a portion of your wages or seizing funds from your bank account.

These are extremely alarming actions.

Owing to the IRS damaging your finances and peace of mind, Paying off your tax debt promptly stops the IRS from pursuing you. It also prevents them from taking your future tax refunds or other money they owe you and using it to settle your account.

Key Takeaway: IRS tax debt results from unpaid taxes and inflates your bill with penalties and interest. It prompts forceful IRS collection until you pay it off.

Personal Loans Explained

Before determining if a personal loan is an effective solution for IRS debt, you need to understand what a personal loan actually is.

A personal loan is money you borrow from a bank, credit union, or online lender. You then repay the loan plus interest in regular monthly installments over 1 to 7 years.

Here’s a quick summary of personal loan details:

• Loan amounts range from $1,000 to $100,000.
• Interest rates are usually 5% to 36%.
• Terms of 1 to 7 years.
• Monthly payments toward principal + interest
• May have origination fees ranging from 1% to 8% of the loan amount.
• Normally, it requires good credit or collateral or a co-signer if credit is poor.

The best aspects of personal loans are the fixed monthly payment and defined repayment terms. This assists you in budgeting vs. credit card payments, which vary. Paying off high-interest debt also reduces interest expenses.

Key Takeaway: Personal loans provide set repayment terms but charge interest and require good credit or collateral.

The Pros of Personal Loans for IRS Debt

Using a personal loan to eliminate your IRS debt offers some significant benefits.

No More Fluctuating Payments

IRS payment plans make your monthly amount change as penalties and interest accumulate. With a personal loan, your payment remains the same each month to match your budget.

Lower Interest Rates

The IRS charges up to 7% interest on their payment plans. Good credit can qualify you for a personal loan with around 5% interest, saving you money. This is especially true when taking out a personal loan with a reputable online provider like Level, offering more competitive rates than traditional banks and a quick application process without sacrificing anything in terms of reliability and safety.

Fast Tax Debt Elimination

The IRS caps payment plans at six years maximum. A personal loan can be as short as 12 months, allowing you to resolve IRS debt faster.

Credit Score Improvement

Making on-time payments raises your score. Paying the IRS also removes public tax liens that damage your credit.

IRS Collection Halt

A loan to immediately pay off the IRS stops them from pursuing your assets through wage garnishment or taking your tax refunds.

Key Takeaway: Fixed payments, lower rates, a faster payoff timeline, credit enhancement, and stopping IRS collection are major pluses.

Read More: Can I Take Out a Personal Loan With a Low Credit Score?

The Cons of Personal Loans for IRS Debt

Personal loans can be useful but also have considerable risks and disadvantages to consider seriously.

High-Interest Rates with Poor Credit

Poor credit means personal loan interest as high as 36% or more. That’s extremely expensive and difficult to pay off.

More Debt Means More Trouble.

If you’re already overwhelmed with debt, adding a personal loan and its payments could worsen your situation. Missed payments = fees + credit damage.

Numerous Fees

Many lenders charge large origination fees of 1% to 8% of the loan amount just to open the loan. There are other fees, too.

May Not Deduct Some Penalties

If part of your IRS debt is for fraud penalties, you may not be able to deduct that amount if you use a personal loan to pay it.

Loss of Flexibility

The IRS offers options to delay collection or settle for less than you owe. A personal loan must be repaid in full.

Key Takeaway: Risks like high rates, increased debt, fees, tax consequences, and a lack of flexibility make personal loans precarious.

Other Methods to Pay off IRS Debt

Personal loans may seem fast and straightforward, but they carry significant risks. Fortunately, you have options beyond loans for managing IRS debt in more adaptable and affordable ways.

IRS Payment Plans

The IRS allows you to pay over 6–72 months. While interest accrues, you may qualify for lower rates with auto-pay.

Offer in Compromise

If you are unable to pay your IRS debt fully, you may settle for less than you owe based on your financial situation. This eliminates the debt and gives you a fresh start.

Non-Collectible Status

If you truly cannot afford IRS payments, you can request to pause enforcement and collection until your finances improve.

Penalty Relief

Ask the IRS to reduce penalties for reasonable cause. This lowers the amount you need to pay.

Tax Expert Assistance

Employing a tax relief professional or specialist to negotiate IRS repayment can save considerable money and stress.

Key Takeaway: IRS payment plans, settling debt, pausing collection, removing penalties, and specialist help provide alternatives.

Final Thoughts

Owning the IRS is very difficult. Taking out a personal loan isn’t necessarily the ideal or sole option. While loans offer some advantages like predictable payments and quickly stopping IRS collection, they also carry major risks like high rates, increased debt, fees, and a lack of flexibility.

Consider alternatives like IRS payment plans, negotiating a lower payoff amount, reducing penalties, or collaborating with a tax expert to resolve your IRS debt without the burden of a loan.