Having tax debt is a major problem for a lot of taxpaying Americans, especially those who are self-employed or own their own business. The IRS does offer settlement options and extensions to pay off the debt, but not all taxpayers qualify. So what do you do if you need to pay off your tax debt and don’t have the money? You could try taking out a loan. However, there are potential downfalls to taking this route.
What Loans Are Available?
If you’re thinking of taking out a loan to pay off your tax debt, there are some options available to you:
- Personal loan: If you owe more than you can handle in tax debt, you might try a personal loan to pay back the debt then simply owe the bank. However, there are two potential problems with personal loans. One is that interest rates could rise if you secure it at a variable rate, making repayment more difficult. Also, if you don’t have the best credit, you may not qualify for the loan, forcing you to try other options.
- Home equity loan: Another option that you may consider is a home equity loan. If you have equity available in your home, this is a good option because you will receive on lump sum that could help you not only pay off your debt, but also leave you with the possibility of receiving tax deductions. (Find other tax deductions you might have forgotten)
Is Taking Out a Loan a Good Idea?
Some wonder if taking out a loan is a good idea, considering that they already owe money. One way to determine whether it’s worth it is to look at the amount of interest and penalties the IRS will tax you if you’re late making payments – or even if you consider an installment agreement or settlement option – versus taking out a loan.
Since interest from the IRS is high and is compounded daily, and you could have a lien placed on your property or your wages garnish for tax debts, some determine that taking out a loan is a better option.
So do you think a loan is right for you? Again, it’s a matter of looking at how much you owe, as well as the penalties and fees you might face versus the interest rates of a loan. Whichever one results in the lowest debt for you is the best route to take (if you’re not sure how to make the calculations, consult a tax professional for assistance).