Can You Pay Taxes With a Personal Loan?

Even the best of us can miscount when it comes to taxes. Sometimes they can be unpredictable, so you may need extra cash to pay off your tax burden. If you struggle with a tax bill that you haven't expected and can't afford, getting a personal loan may be an option. Let's talk about whether using a personal loan for paying taxes is a good financial strategy. 

What Is a Personal Loan?

A personal loan is an unsecured debt with fixed interest rates and flexible repayment terms. As the name suggests, it can be used to cover a large number of an individual's personal needs. A borrower will get the needed amount in a lump sum via an electronic deposit into a bank account. Then, they need to repay the funds over a certain period in equal monthly installments. 

What Can a Personal Loan Be Used for?

In fact, you can use your personal loan funds completely at your discretion. Although a lender may specify your loan purpose in an application form, it typically doesn't track whether your actual spending matches it. There are multiple ways to use personal loans. Some examples include medical bills, weddings, education, home improvements, vacation, debt consolidation, and other personal needs, including paying taxes.

Is Paying Taxes a Good Reason for Taking a Personal Loan?

There's no simple answer. Getting a personal loan to pay taxes has its advantages and drawbacks, so your current financial situation will be a determining factor. On the one hand, it will help you avoid penalties and reduce the financial burden at some point. On the other hand, you obtain debt that can affect your financial situation in the long run.

Also, you need to understand how personal loans work. If you're approved, you will get the requested amount and then pay the money back in accordance with your repayment schedule. In addition to your loan proceeds, you will also have to pay interest set by a lender. Thus, you will have to pay more than you actually borrow. At the beginning of 2022, the average personal loan interest rate was 10.28%. The interest rate you will get depends on your credit score.

Thus, getting a personal loan to pay taxes may be a reasonable option if you make calculations thoroughly, know how it works, and use it cautiously.

Where Can You Get Personal Loans for Paying Taxes?

Personal loans for taxes are typically offered by banks, credit unions, and some online lenders. Traditional institutions offer more favorable loan terms and lower interest rates. However, their eligibility requirements are stricter. You need to have good credit and go through a hard credit check to qualify. Online lenders are not so meticulous when it comes to your credit background. They usually pay attention to your ability to repay the funds. However, their loans come with higher interest rates and fees.

Benefits of Paying Taxes with a Personal Loan

Here's how you can benefit from using a personal loan to pay taxes:

  • Sufficient amounts are available. Most personal loans have a minimum loan amount of $500 to $1,000, with the maximum reaching up to $50,000. If you have a stable income and acceptable credit, you can expect to get enough money to cover your tax obligations;

  • Reasonable rates can be offered. If your credit score is around 700, you can expect to get an interest rate as low as 4.99%. This will prevent you from overpaying and save your money in the long run;

  • Flexible repayment terms. You can choose a repayment period that will suit your budget. Terms can range from 12 and 60 months;

  • No collateral is needed. You don't need to provide a pledge to access the funds. This means that there's no risk of losing your property, even if you fail to repay your loan;

  • Don't hit your savings. Sometimes unexpected tax bills can be just the latest in a string of financial problems. If you're temporarily unemployed or have other necessities to cover, it may be better to get a personal loan than to tap into your savings.

Pitfalls of Using Personal Loans for Taxes

Although getting a personal loan can help you pay off your tax burden, you need to assess the potential risks associated with this option:

  • Going into debt. Getting a loan can negatively affect your budget and make you change your regular lifestyle at some point. You need to be ready for one more expense category and make sure your potential monthly payments will be affordable;

  • Interest rates and fees can be higher than you expect. Especially if you apply for a loan with less-than-ideal credit. Add here long repayment terms, and you will see that your total loan cost can be several times higher than the initial loan amount you get;

  • Impact on your credit score. When you apply for a personal loan, a lender checks your credit and payment history through major credit bureaus. This way, your credit score can temporarily go down by a few points. Additionally, it can increase your debt-to-income ratio, which is also a component that affects your credit score. Of course, if you pay your loan timely, your credit rating will increase over some time. However, if you fail to pay on schedule, a lender will report your late payments to credit bureaus, resulting in significant credit score damage;

  • Potential debt cycle. If you take out a new loan to cover your existing debts or other financial obligations, it can trap you into a debt cycle that can be hard to break. Therefore, try to turn to personal loans for taxes only as a last resort, and always be realistic about your ability to manage this debt.

Consequences of Non-Paying Taxes

Ignoring your tax bills and avoiding communications with the IRS are the worst things you can do if you face financial problems. Letting it slide can lead to unpleasant consequences, such as wage or federal benefit garnishment. This means that a portion of your cash flows will be seized and sent toward your tax obligations. If you contact the IRS and be honest about your situation, they may be willing to offer you a payment plan. This will help you split the amount you owe into several parts and sometimes avoid paying any fee.

Alternatives to Getting Personal Loans to Pay Taxes

If you're not sure about whether a personal loan is a reasonable option for your situation, here are a few alternatives.

IRS Installment Agreement/Payment Plan

Asking for an installment agreement or a payment plan from the IRS can help you save money on interest and pay off your taxes in several equal parts instead of paying the whole amount in one lump sum. The terms you can get depend on the repayment period you choose and your tax bill amount.

If you owe between $50,000 and $100,000 in combined taxes, the IRS can offer you a short-term payment plan for up to 6 months without any setup fee. For those who owe less than $50,000, the IRS offers plans with repayment periods between 6 months and 6 years. This way, setup fees will be charged. Their amounts range between $31 and $225, depending on the options and the way you apply.

401(k) Loan/Withdrawal

If you have a 401(k) retirement plan, there are a few more options to consider. First, you can withdraw money from your 401(k) account's vested balance. Free-of-charge withdrawal is available for individuals that are at the age of or over 59 and a half. If you're younger, any withdrawal from your 401(k) account will cause additional penalties on top of income taxes. The penalties are typically 10% of the amount that you're going to withdraw.

Additionally, you can borrow money from your vested 401(k) account balance. This way, you will have to pay interest that will be deposited back into your account. This means that you will pay interest to yourself. The amount you can borrow is either $10,000 or 50% of your vested balance up to $50,000, whichever is greater.

Credit Card

If you have a credit card, you can use its balance to pay off your tax bills, provided that your credit limit corresponds to the amount you owe in taxes. This option especially makes sense if your credit card issuer provides an interest-free promotional period. This way, you will be able to avoid paying interest if you manage to repay the funds before this period ends. This period may be between 6 and 24 months.


The best thing you can do for yourself in the future is to think about where to get money for taxes in advance. This way, you simply need to include taxes on the list of your expense categories and set aside a fixed amount toward them each month. Thanks to this, you can be sure that you don't lose sight of your taxes and will always have money in case an unexpected bill arrives.


we are happy to provide you with the kind of banking you love