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If you’ve expected a refund on your taxes but instead received a tax bill, you may wonder what your payment options are. You may be looking into an installment plan with the Internal Revenue Service or a personal loan.
Whether it’s more cost-effective to take out a personal loan to pay your taxes or leverage the IRS payment plan will depend on a number of factors, like the amount you owe and the terms of the loan, along with any associated fees. Let’s review the costs of each option using a $20,000 tax bill as an example. This way, before signing the dotted line on any agreement, you’re informed enough to make the right choice based on your circumstances.
Key Takeaways
- Even with additional penalties and interest you may have to pay to the IRS on a payment plan, you may end up saving more than getting a personal loan.
- Personal loan rates tend to be higher than interest rates on an IRS payment plan, especially if you have a weaker credit profile. This can result in you paying more over time with a personal loan.
- Overall, the right choice depends on your unique credit profile as well as your ability to meet monthly payments and avoid defaulting on any payment plan.
Paying It Off With an Installement Agreement
An IRS Installment plan is an agreement with the IRS that you’re going to pay taxes you owe over a specific timeframe. There are two types of installment plans: short-term (lasting 180 days or less) and long-term (with monthly payments).
Short-term payment plans have a no setup fee but do accrue penalties and interest until the total balance owed is paid in full. Long-term plans have a setup fee, but the amount depends on the method you choose.
For long-term payment plans, if you apply over the phone, the setup fee is $107. If you apply online, the cost is $22, provided you choose to pay through Direct Debit (automatic payments from your checking account). However, if you want to pay from your checking or savings account (not automatically), you’ll pay a $69 setup fee (if applying online) or a $178 setup fee (if applying by phone, mail, or in person).
Suppose you owe the IRS $20,000 but cannot pay it within 180 days or less. In this case, if you opt for a long-term payment plan, you’ll have to pay 7% in interest per year (compounded daily), along with setup fees and penalties of 0.25% per month. You plan to pay it off in three years.
| IRS Installment Plan Costs | |
|---|---|
| Amount Owed | $20,000 |
| Interest (7%) | $2,232 |
| Penalty (0.25%) | $956 |
| Setup Fee | $69 |
| Total | $23,257 |
On your installment payment plan, you will make 36 monthly payments of $618 for a total of $23,257.
Paying It Off with a Personal Loan
Similar to IRS payment plans, you’ll pay interest on a personal loan. Your rate will be affected by your credit score and financial situation.
| Personal Loan Costs | |
|---|---|
| Principal | $20,000 |
| Interest (22.95%) | $7,852 |
| Total | $27,852 |
If we use the May 2025 average personal loan rate of 22.95% and a term of 36 months, as we did for the installment loan, you will make 36 monthly payments of $774, for a total of $27,852.
Ultimately, the personal loan is $4,595 more expensive than the IRS installment loan. The installment loan is the better choice unless you can find a personal loan with an interest rate of 10% or less.
The Bottom Line
Before you choose one option or the other, calculate the total costs associated with both. Consider interest rates, setup fees, penalties, and other loan costs. Next, evaluate your budget: Do you have room for monthly payments? Also include any other financial priorities you have, such as savings goals.
