This content is sponsored by PenFed Credit Union, federally insured by NCUA.
Although taxes are one of life’s guarantees, the amount you owe the government may bring some surprises. If you have a tax burden you can’t afford to pay, a personal loan is an option that allows you to settle the debt without breaking the bank while also avoiding IRS penalty fees and interest.
Tax season is here, so you may want to figure out if a personal loan is a good option to help you pay your tax bill. Taking out a personal loan allows you to borrow an unsecured lump sum of money that you can repay in fixed monthly payments with interest over a set period of months or years.
While using a personal loan to help with tax costs is an option, it’s always wise to consult a tax professional before making a decision. They can make sure you have the most recent information on taxes and tax laws, said the experts at PenFed Credit Union.
The experts at PenFed point out that there are many advantages and disadvantages when using a personal loan to pay a tax bill.
Among the benefits: it’s a quick and easy process. You can often apply online and, once you’re approved, you can receive the funds in as little as 24 hours with a direct deposit or ACH transfer. Personal loans are also predictable. The interest rates and terms are set so you know what each monthly payment will be from the beginning.
Using a personal loan to repay tax debt can help you avoid late-payment penalties or more serious consequences such as wage garnishment, US News & World Report pointed out.
A personal loan is most often unsecure, which means you don’t have to offer collateral to back the loan.
Personal loans can be a less expensive way to pay off your tax bill, too. While you can use IRS payment plans or credit cards to pay off your tax bill, these methods can be expensive and can lead you to pay more in the long run because of interest, PenFed said.
“Personal loans offer more competitive rates than other unsecured debt,” PenFed said. “You may also qualify for special interest rates by borrowing from a bank or credit union that you’re already a member of.”
Lastly, turning to a personal loan for tax bill help can help prevent your emergency fund from getting depleted. Emergency funds protect you from unexpected financial emergencies, so you want to be smart about how you dip into it, PenFed said.
“Tax loans offer you some breathing room instead of panicking or scrambling to come up with the money,” PenFed said.
While there are many benefits to using a personal loan to help out around tax time, there can be some downsides as well.
You still need to qualify for a personal loan, so your credit score and debt-to-income ratio can factor into whether you’re approved. Also, personal loans can potentially ding your credit score by increasing your credit-utilization rate. This can also make it a challenge to open up new lines of credit or get a preferred interest rate.
Personal loans can carry minimum borrowing amounts with them. This means you could end up borrowing more than you actually need, which can translate to paying more interest and raising the total cost of paying off your taxes.
Fees can add up when you take out a personal loan. Look for a lender that doesn’t charge additional fees like application and origination fees as well as penalty fees for prepayment, said the experts at PenFed.
“Make sure to calculate the cost of fees and interest when deciding whether a personal loan is the right way to pay your taxes,” PenFed said.
Owing money during tax season can be an unwelcome reality for many people – but there are options to consider when tackling any tax debts, PenFed notes.
“You can avoid excess fees and high interest rates by choosing a proactive solution (like a personal loan) and getting that tax debt paid off fast,” PenFed said.
Read more on PenFed Credit Union’s website. PenFed Credit Union is federally insured by NCUA.
