It’s that time of year when you’ll hear loads of advice on the best ways to use your tax refund and whether you should save it or invest it.
But some of us won’t be fortunate enough to get a refund and will instead owe. If you find yourself unable to pay your tax bill, you may want to consider a short-term loan to cover it.
How Much Interest Will You Pay?
One of the most important things to consider is the interest rate charged for each payment option. Will it cost you more to make payments on a loan, or is it cheaper to set up an installment plan with the IRS? The interest charged for payment plans with the IRS are sometimes significantly lower than the interest rate you might get with a loan, especially if you have bad credit or no credit. The current interest rate for underpayment of taxes is 3 percent. The average interest rate for personal loans, depending on your credit score, can range from slightly less than 3 percent to as much as 30 percent.
[See: Answers to 7 Burning Tax Questions.]
Other IRS Penalties
Even if you know you will owe taxes this year, remember that it’s best to file on time. If you file late, you can end up paying a penalty of 0.5 percent per month, which on a $1,000 debt, can cost you $5 each month you’re late, plus interest. The penalty for not filing on time is more than any other penalties you might incur. No matter what you owe or how you pay, it’s important that you file your tax returns by the annual deadline.
Consider How Much You Owe
Whether a short-term loan is the best option for paying your tax bill may also depend on the amount you owe. If you owe less than $1,000, short-term loans may be the best option. These loans allow you to pay down your debt with affordable monthly payments in about a year’s time, and you won’t pay an obnoxious amount of interest, especially if you get a loan through your credit union or bank.
If you owe the IRS more than $1,000 or your tax bill is high enough that you won’t be able to pay it down within a short period, it may be best to take the installment plan and set up monthly payments with the IRS. On the other hand, if you owe just a couple of hundred dollars, and you can pay it off quickly (just not all at once), you should consider using a credit card and paying it off in as few payments as possible.
[See: The Best Credit Cards.]
Alternatives to Short-Term Loans
Many people choose to use other options for paying their tax bills. One of the most common is by credit card, which can allow you to pay your tax bill in monthly installments and earn cash back or travel rewards that the card may offer. Plus, if you run into problems paying it off right away, later on, you may be able to take advantage of a lower interest rate or even a 0 percent introductory APR with various balance transfer credit cards. If you use a credit card to pay your taxes, you could earn a little extra from your debt in rewards, bonuses or perks, and save some money in interest and fees at the same time.
Making Your Payments
Whether you pay with a personal loan, credit card or an installment agreement with the IRS, make sure you keep up with the payments. If you miss payments or default on your obligation, you can damage your credit rating and face higher fees and interest rates, making your situation worse.
[See: 12 Simple Ways to Raise Your Credit Score.]
The IRS will also work with you if you can’t make any payments on your debt. In some instances, you can request an Offer of Compromise to decrease the amount of your tax bill. You may also be able to request an extension until you secure a loan or way to work on paying the amount you owe. In any event, it’s best to let the IRS know and work with them if you are having difficulty paying your tax bill. Above all else, don’t risk additional penalties and interest by not filing or filing late.
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Can’t Pay Your Tax Bill? When to Consider a Short-Term Loan originally appeared on usnews.com
