A personal loan can be used for a variety of purposes. Some people use it to fulfill their goals, such as purchasing a house, taking a dream vacation, or buying a premium gadget. Other people who fulfill the personal loan eligibility criteria may opt for a personal loan to consolidate their debts. Interestingly, some individuals opt for these unsecured loans to pay their tax debts. This often happens when the tax debts arising from existing tax laws outrival the money available at taxpayers’ disposal.
In such situations, many people find it a better option to cope with the personal loan interest rates rather than break into an existing investment to liquidate funds to pay their tax debts. But that gives rise to the question: Is it okay to use a personal loan to pay tax debts?
Like everything else, there are many upsides and downsides to this financial decision. Here is a closer look at both sides of the line.
Reasons why it makes sense to use a personal loan to pay tax debts
There are many reasons why this strategy can actually be a good decision.
Preservation of investments
Opting for a personal loan to pay taxes helps keep the taxpayer’s investments safe. So, over the years, the planned goals tied to those investments can be met as per the original financial strategy the taxpayer had in place. It also ensures that taxpayers do not need to tap into their emergency funds, preserved for more pressing situations like medical emergencies.
No burden of tax penalties
People who fulfill personal loan eligibility criteria can also take these unsecured loans to pay taxes because it saves them from the burden of heavy penalties, which are levied in case of delayed tax payments or non-payment of taxes. So, taking an unsecured loan to settle tax dues is an easy and hassle-free way to pay off tax debts while simultaneously steering clear of any penal charges.
Improvement in credit score
An understated advantage of taking the personal loan route is an improvement in the borrower’s credit score. Of course, this is true only if the taxpayer repays the loan promptly, as per the repayment schedule. But that’s easy enough to do for individuals who possess good financial discipline. And by boosting credit score, it becomes easier to avail of loans in the long run.
More affordable interest rates
Personal loan interest rates are generally more affordable than many other forms of credit, such as credit cards. So, when taxpayers find themselves facing a huge tax debt beyond the level of liquid cash they have with them, it would be a smart idea to opt for personal loans instead of high-interest options like credit card payments since personal loan interest rates can be more easily managed.
Things to keep in mind before using personal loans to pay tax debts
While there are many upsides to this strategy, there are also some things that taxpayers should keep in mind before choosing to take a loan to pay taxes.
- Personal loans come with an upper limit. So, in the case of huge tax debt, a loan may not be enough to cover the dues.
- Personal loans from some lenders may also come with prepayment charges. People who wish to prepay all or part of their debt will need to keep this in mind.
- Personal loan eligibility criteria need to be met before a taxpayer can choose to adopt this financial strategy.
Given that both sides of the coin have been explored, it’s clear that opting for a personal loan to pay tax debts does come with some advantages. When managed correctly, this can help individuals clear their tax dues while simultaneously enjoying a host of other benefits.