Tax authorities have great power over our finances and the ability to issue severe penalties. That’s why you should be especially worried if you owe them money. So, if you need instant cash to settle your IRS debt, using a payday loan as a way to pay off your taxes might be the solution for you. These financial products are easy to get, provide you with cash within a day, and come with simple application procedures.
Should I Take out a Loan to Pay Taxes?
Using a personal loan to pay taxes can be a wise choice if you can’t pay your taxes on time. That’s why many people consider taking out a payday loan to settle IRS debts. Financing your IRS payment with a short-term loan may help you avoid penalties and additional interest fees.
On the other hand, you may be able to agree on an IRS installment plan with the government to pay your tax bill. Potentially, you could save decent cash if you use personal loans with lower interest charges. Remember that you may be able to use a payday loan for any legitimate purpose, including paying your taxes.
How Does Taking a Payday Loan Work?
The procedure is simple. You borrow short-term funds from a private lender and then repay the loan with your next paystub. In the meantime, you use the personal loan to pay off your tax debt. Any payday loan will entail charges, but the interest rate can be lower than an IRS installment plan rate.
Small-dollar loans allow you to take out an amount ranging from $100 to $1,500. The higher your credit score and income, the more money you could borrow.
Most loans come as secured and unsecured. Some lenders can offer a secured 500 dollar loan. Collateral increases the chances for approval, but the lender can seize it if you don’t pay off the balance. Secured loans lower the risk for the lender but could worsen the personal finance of the borrower.
Many personal loans entail no prepayment penalty, so you won’t pay extra when paying off your loan earlier. Though there are ways to save on interest, payday loans have their cons, too.
Reasons to Consider a Payday Loan to Pay Taxes
Using a payday loan to settle payments to the IRS could be what you need. A well-termed personal loan entails several benefits over other payment options, as follows.
- Avoid dealing with Uncle Sam: With payday loans, you can stop worrying about the IRS going after your wages. You won’t have to sell your assets or have your property seized. Using a payday loan to pay taxes could help you prevent all penalties because you would deal with the lender, not the IRS. However, it’s crucial to choose a personal loan with lower fees than those of the tax authorities. Plus, ensure you make regular monthly payments.
- Transparent rates: Payday loans provide clear terms when you apply. You’ll learn of any interest rate and APRs involved upfront. Plus, it’s a less risky way to pay your tax bill than with IRS payment plans. Getting a loan to pay taxes may not always sound appealing, but it’s better than having a tax lien against your property.
- Easy to qualify: Eligibility for payday loans is easy to achieve. The only limitations to get up to $1,500 are sufficient income and a good credit score.
- Fast approval and turnout: Filing out for a personal loan takes a few minutes. Approval usually follows quickly afterward. Many payday lenders transfer the money within a day, so you can use the personal loan to pay your taxes.
- No collateral involved: With personal loans, you don’t have to put collateral such as your vehicle or house. Of course, an unsecured loan involves higher APRs, but that’s the rate you’ll eventually pay for convenience.
- Lower cost: Using payday loans to cover a tax bill has many upsides, including no penalties. Payday loan expenses are far lower than those of some credit cards and an IRS installment plan. Moving tax liabilities to a private loan reduces the risk of entering a never-ending debt cycle.
Drawbacks to Using a Payday Loan to Pay Taxes
Before you opt for a payday loan, consider your choice from every angle. While getting a payday loan to pay a tax bill is viable, the choice entails some downsides, too. You could resolve the IRS issue but potentially create other problems if you’re not vigilant enough.
- Taking on extra debt: If a new payday loan payment further damages your already strained budget, you can end up in default. Borrowers must ensure they can tackle new debt and reconsider their income and spending ratio.
- A costly option: Using a personal loan to pay taxes can cost you a lot. Interest increases if your credit score is bad and you aren’t eligible for the lowest rates. APRs often reach 400%, and unaware borrowers could get stuck in an endless debt cycle.
- Short-term repayment: Payday loans must get settled with your next paycheck. So, if your financial situation doesn’t improve within this timeframe, any failure to pay can get you a new worry.
- Credit score reflections: If you default on a personal loan, this can stay on your credit report for up to seven years. Also, applying for a payday loan can affect your credit score since new credit inquiries show up on your credit report. In this case, going for an online lender like us who performs soft credit checks may be the ideal solution.
Will the Amount of Your Payday Loan Cover Your Tax Bill?
Getting a payday loan amount enough to cover the whole tax amount you owe is an essential issue to consider. Approved loan amounts vary across lenders and states but typically stretch from as little as $100 up to $1,500. The funds you may qualify for will depend on your income and credit history. Before applying for a payday or personal loan to pay taxes, explore whether the amount would suffice to cover outstanding tax obligations.
For instance, if you filed your income tax return on time but still owe $1,000, you have three paths to take. Going for an IRS installment agreement for six months means you’ll pay about $120 in fees, interest, and penalties. Second, a credit card with a 15.1% interest rate will cost you $100 in fees and interest. Last, you will only pay $55 on top of the amount borrowed with a personal loan.
What Happens if You Can’t Pay Your Taxes?
Income tax becomes due as you earn it. Not settling tax debt in due time will bring your twofold concerns. You’ll have to pay interest and penalties until paying off the balance in full.
Thus, you must settle your obligations through quarterly tax payments via withholding or at tax time. Not paying by the due date means the IRS can charge an underpayment penalty of 0.5% for each month of unpaid taxes. This penalty can rise to 25% of the unpaid taxes. After informing you of their intent to levy property, IRS charges increase to 1% if you fail to pay in ten days.
In case of a dishonored check, you may face additional charges. In short, when payments don’t go through, Uncle Sam can penalize you 2% of the tax due for payments over $1,250. For payments under that threshold, the penalty is 2% or $25, whichever is less.
The IRS also charges interest, which starts compounding daily from the day your tax return is due. Hence, even if you are eligible for a filing extension, the amount you owe doesn’t get waived, regardless of the extended filing date. Interest rates add up quarterly, and the current rate for underpayments is 5%.
How Long Do I Have to Pay My Taxes if I Owe?
As a taxpayer, you must file your taxes on Form 1040 at or any time before the tax filing deadline. The deadline usually stretches to April 15 unless that is a non-working day. The filing deadline got extended to May 17 in 2021, due to the COVID-19 financial crisis. You may use form 4868 for an automatic extension to file your taxes.
Failure to file your income tax return by the due date means the IRS can impose a late filing penalty. In short, you’ll be paying 5% of any unpaid taxes every month the return is late, for up to 150 days. Being late for over 60 days means you’ll owe either the entire accrued amount or $215, whichever is less. The penalty will reach $435 or 100% of the owed amount, whichever is less if you’re late another two months.
Failure to pay also leads to a setup fee. Moreover, the IRS can charge a late payment penalty and interest on any unpaid balance if you fail to pay on time. In this case, you’ll avoid the late-filing penalty and can seek an extension by October.
What Is the IRS Fresh Start Program?
The IRS Fresh Start Program targets troubled taxpayers who don’t file and pay off substantial tax debts. The Program allows a monthly payment plan over six years when the entire debt should get settled. Each month, indebted taxpayers should pay a specific amount based on their current income and liquid assets value.
The IRS payment plan aims to ease the process of repaying high-cost tax debts. Plus, it assists individuals in avoiding the consequences of owing to the IRS. Some of the detriments people can avoid using the Program include penalties, high interest, liens, seizure of assets, and wage garnishments.
To become part of the IRS installment program, taxpayers should qualify first. In short, only people owing a tax debt of $50,000 or less are eligible for the simplified repayment process. Taxpayers who apply can select one of the three repayment options, of which the extended installment agreement is the most common one.
Also, the IRS considers the hardships faced by people who remained jobless. Unemployed taxpayers for over 30 days may be eligible to have the penalties waived. After all, with the Fresh Start Program, you can be confident that you are focused on eliminating the tax burden.
Alternatives to Using a Payday Loan to Pay Taxes
Are you facing tax liabilities that you can’t settle right away? Well, you shouldn’t put all your eggs in one basket. Besides personal loans, you have other options to pay off tax bills. Below are the most viable alternatives to come to terms with your IRS debt.
- Short-term IRS extension: The IRS may allow an extension to repay debt in full for up to four months. Meaning, if you can pay the total amount within 120 days, you may get additional time. Though fees don’t get charged for such arrangements, other expenses will accrue along the way. More specifically, you’ll pay interest of 3% and any penalty of 0.5% per month on the unpaid balance. Whatever the downsides, getting extra time to pay back taxes when you can is a wise step to take.
- Long-term payment plans with the IRS: Consider applying for an installment agreement to get more time to pay your taxes. You can apply both online and in-person and inform the IRS of the monthly payment you can cover. Once the IRS reviews your application, they’ll either approve or reject it. The setup fee depends on the method of application and your income level. Also, penalties and interest will accrue until your balance gets paid in full.
- Credit card: Credit cards are another option to pay your tax bill. Here, the processing fee can vary, and you pay it to the processor and the card issuer. The average processing fee for credit card payments strands at 1.93% of the payment amount. You must always consider the interest rate of your credit card. The bad news is that current interest rates exceed 15%, which is why lots of people use a personal loan instead. Yet, if you can get a 0% APR credit card, you may be able to pay your taxes without interest.
Bottom Line
As the tax deadline draws near, owing money to Uncle Sam is probably your worst nightmare. Whatever option you choose to settle tax debt, don’t ignore the problem. If the IRS offer in compromise allows more time, a payday loan may prove incredibly helpful.
What all taxpayers must do is file their return in time and pay what they can. If you owe money in taxes and are short on cash, don’t panic. You have several repayment paths to take, such as using a personal loan to pay tax bills. Of course, some options are more cost-efficient than others, so you must always consider all ups and downs.
