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Is it possible to use a personal loan to pay taxes?
A personal loan will be a type of loan that will allow individuals to borrow money from a lender for personal use. Unlike secured loans which are required to be used for a particular reason such as a mortgage and a car loan.
Personal loans will be unsecured meaning it doesn’t require any collar and the borrower is approved by their creditworthiness. Personal loans often come with fixed terms meaning that the interest and payment will remain the same throughout the life of the loan.
Terms for personal loans are usually anywhere from a year and all the way up to seven years. Personal loans can be used for anything such as car repair, home improvements, bills major purchases, and of course taxes.
However, before using personal loans for their taxes, the borrower needs to review all of the options available to them and should choose the loan that will be right for them.
These are the advantages of using a personal loan for tax payments:
- Flexible repayment terms: Personal loans typically will come with flexible terms that can be customized to suit your financial situation. This will help you break down a big tax bill into more manageable payments.
- Lower interest rates: Personal loans often will come with lower rates than many other loan products such as credit cards. Having a low-interest rate can help you save money because you’re paying less to the lender for borrowing the money.
- Collateral Free: Having to put collateral for your loan is not only challenging for some but also can put your assets in danger. If you secured a loan with collateral you will often have lower interest rates but if you default on the loan the lender can confiscate the collateral to recoup some of their loss.
- Lighting approvals: Most major lenders will offer quick personal loan approvals. Most lenders offer instant approvals and as fast as next-day funding. This will help you secure the funds quickly and pay that tax bill.
- Helps your credit score: Getting a personal loan to pay off your taxes will not only help you not have any troubles with the IRS. But will also improve your credit score and credit history as long as you maintain timely payments for your loan.
These are the disadvantages of using a personal loan for tax payments:
- Higher interest rates: Personal loans definitely lower interest rates than many other lending platforms. There are still many loans that you can secure that will have lower interest rates. This will help you maximize saving money on your loan products and it is important to look at all of your options.
- Fees: Some personal loan lenders will have fees associated with their personal loans. It is important to understand the full fees associated with your loan to determine the cost of borrowing money. The main fees that some personal loans will come with are origination fees and prepayment penalties, it is important to take that into consideration before choosing the loan option that’s right for you.
- Increase in debt: Since personal loans are unsecured they can increase your debt-to-income ratio. Which is one of the main factors lenders use to approve you for loans. Meaning that if you need to acquire a different loan product you might be denied.
- Impact your credit: While personal loans can benefit your credit score, they can also damage your credit score. If you make a payment or default on your loan this can impact your credit account which can affect your chances of getting future approvals.
- Inability to negotiate with the IRS: If you are in a situation where you’re having trouble paying your taxes you’re able to set up a payment plan with the IRS to help you settle your debt. But if you already have the money to pay them they will not be able to negotiate with you and make a payment plan.
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What happens if you fail to pay your taxes?
Failing to pay your taxes can have serious consequences for the government. If you end up not paying your taxes on time they will charge interest rates and penalties. The IRS can also legally garnish your washes or freeze your bank accounts to pay your tax debt.
Also in many extreme cases, the government can seize your property such as your car or even your home. Not paying your taxes can also get legal action taken against you which might result in criminal charges.
Additionally not paying your taxes will harm your credit score which can make it difficult to obtain loans in the future. It is important to address your tax bill and prepare for it throughout the year to not be caught by surprise.
Interest and penalties: Failing to pay your taxes on time will be charged interest and penalties on the amount you owe. Your interest will depend on the federal short-term interest rate plus 3%. Penalties can add up quickly if you own a larger amount and you tend to miss the deadline. You are able to set up payment arrangements with the IRS to help you pay your tax bill.
Wage Garnishment: The IRS can legally garnish your income if you owe back taxes. This means that they are able to take part of your paycheck which will be used to pay your tax bill. The amounts they are able to garnish will depend on factors such as marital status, exemptions, and income.
Property Seizure: Usually this is their last resort but the government is able to seize your property to pay your tax bill. This typically will happen if your debt is really large and they have repetitively failed to collect the amount.
Legal Action: Failing to pay your taxes can result in legal actions from the IRS. This can result in a lawsuit or criminal charges. If you end up getting charged with tax evasion you will be fined and even have jail time.
Damage to credit score: IRS can put a tax lien on your credit score which can negatively mark your credit report for years. This will harm your credit score and will increase difficulties in obtaining a loan product in the future.
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Different ways to pay your taxes besides taking out a personal loan
If you’re having a hard time fulfilling your tax bill, there are many options in addition to personal loans you should consider. Paying your taxes on time can save you thousands in late payments or fees. Here are some other options to consider when paying your tax bill:
Payment plan with the IRS: If you own less than $50,000 in taxes, penalties and interest combines. You have the option to apply for the IRS payment plan online. You are able to choose from a long-term installment plan or short term. This can give you extra time to pay your taxes. Depending on what plan you end up going with there might be fees, interest, and penalties charged until you pay in full.
Offer compromise: The compromise offer is a difficult process that will involve showing the IRS that you are unable to pay your tax bill in full or you are not able to pay at all because of financial hardship. You will be required to provide extensive financial information and this can take a long period of time to complete, but IRS might be able to waive a portion of your taxes or even everything depending on your situation.
Pay with a credit card: A credit card could be a good choice to pay your taxes, but it is important to understand that there will be a processing fee associated with the payment. Also, it is important to consider that credit cards have high-interest rate fees, which means you need to make a plan on how to speed up repaying your bill.
Retirement account loan: If you have a 401(k) plan you are able to borrow from it to pay your tax bill. It’s important to understand that there are fees and interest associated with these options and you might be mission out on financial gain. Also if the loan is not paid back it can be treated as a distribution of retirement prematurely which will result in a larger tax bill and penalties.
Home equity loan: If you’re a homeowner you can take out a home equity loan or line of credit to pay your tax bill. Getting a home equity loan will get you lower interest rates than many other loan options, but this will put your home a risk if you are unable to make the payment. Also, home equity loans will only work if you have enough equity in your home to qualify for that loan.
Sell assets: Many of us have items or assets that we accumulate over time. Even though this might not be the best option but selling some of your assets like stocks, cars or anything of value can give you the funds to pay your tax bill. If you have things you have collected over the years be sure to consider pawning those items, selling them online, or even hosting a garage sale. This can help you increase some cash to pay that tax bill.
Get a side hustle: Side hustles are a great way to pay for items or put some extra cash into your pocket. Increasing the hours you work at your current job or getting a side job can increase your cash flow making it easier to pay some of your tax bills. This might not be an ideal option if you have a large tax bill but can definitely help your financial situation.
Borrow from a friend or family: Borrowing from a friend or family can give you the cash to pay your tax bill. With these options, you are able to get money with much more flexible terms and possibly no interest charge. This can help you save hundreds on your tax bill, but it is important to understand that borrowing money can affect your relationships. Be sure to create a plan to pay back your close ones on their loan.
There are many options to choose from when paying your tax bill and your ability to get creative by choosing the right options for you. It is important to consider all the pros and cons of every opinion. It would be a good idea to consult a financial adviser to help you choose the right option for you.
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Frequently Asked Questions (FAQ)
When are taxes do?
In the united state typically taxes are due by April 15th but deadlines can be extended under certain circumstances.
Who do I pay the taxes to?
The entity or organization that you will pay taxes to will depend on the type of taxes you own. But usually, you own taxes to the federal government, local government, and state. It is important to get professional help for you to pay your taxes properly.
Can I do taxes myself?
Yes, you are able to do taxes yourself but it can get complicated so it is suggested to use a professional to assist you with your process.
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