Getting a tax bill you cannot cover in full raises an immediate question: should you use a personal loan to pay taxes, or is an IRS installment plan the smarter route? The answer usually comes down to interest rates, fees and how disciplined you can be with monthly payments, and running the numbers on a real example makes the trade offs much clearer.
What an IRS Payment Plan Actually Costs
The IRS offers two main types of installment agreements. Short term plans run 180 days or less and carry no setup fee, though interest and penalties still accrue until the balance is paid off. Long term plans stretch across monthly payments and do come with a setup fee, the size of which depends on how you apply and how you pay.
Apply by phone for a long term plan and the setup fee runs $107. Apply online and choose Direct Debit, meaning automatic withdrawals from your checking account, and the fee drops to just $22. If you would rather pay from your bank account manually rather than through automatic debit, the fee is $69 when applying online, or $178 if you apply by phone, mail or in person.
Say you owe the IRS $20,000 and cannot pay it off within six months. Choosing a long term plan means paying 7 percent annual interest, compounded daily, plus a monthly penalty of 0.25 percent, on top of whichever setup fee applies. Spread that over three years, using the $69 online setup fee for someone paying from a bank account without automatic debit, and the totals look like this.
| IRS Installment Plan Costs | Amount |
|---|---|
| Amount Owed | $20,000 |
| Interest (7%) | $2,232 |
| Penalty (0.25%) | $956 |
| Setup Fee | $69 |
| Total | $23,257 |
That works out to 36 monthly payments of $618, for a grand total of $23,257 by the time the debt is cleared.
Running the Same $20,000 Through a Personal Loan
A personal loan works differently. There is no setup fee structure like the IRS uses, but the interest rate depends heavily on your credit score and overall financial profile, and for many borrowers that rate is steep. As of May 2025, the average personal loan rate stood at 22.95 percent. Apply that rate to the same $20,000 balance over the same 36 month term and the math shifts considerably.
| Personal Loan Costs | Amount |
|---|---|
| Principal | $20,000 |
| Interest (22.95%) | $7,852 |
| Total | $27,852 |
That comes to 36 monthly payments of $774, totaling $27,852. Compared with the IRS installment plan's $23,257, the personal loan ends up costing $4,595 more over the life of the repayment period. Unless a borrower can find a personal loan priced at 10 percent or less, the IRS plan wins on pure cost.
The gap comes down almost entirely to rate. IRS penalties and daily compounded interest sound punitive, but a 7 percent annual rate paired with a 0.25 percent monthly penalty is still far cheaper than what most unsecured personal loans charge borrowers with average or below average credit. Someone with excellent credit might find a personal loan closer to double digits, which would narrow or even flip the comparison, but that is not the typical borrower's experience in the current lending environment.
Comparing the Two Options Side by Side
| Factor | IRS Installment Plan | Personal Loan |
|---|---|---|
| Setup or origination cost | $0 to $178 depending on application method and payment type | Varies by lender, often 0 to several percent of loan amount |
| Interest rate | 7% annually, compounded daily | Averaged 22.95% in May 2025, varies by credit profile |
| Penalties | 0.25% per month on unpaid balance | None, but late payment fees may apply |
| Eligibility | Available to taxpayers who owe the IRS and apply through approved channels | Depends on credit score, income and lender approval |
| 36 month total on $20,000 | $23,257 | $27,852 |
Eligibility matters here too. Anyone who owes the IRS can generally apply for a payment plan, though the fee structure changes based on application method and whether you use Direct Debit. A personal loan, on the other hand, depends entirely on a lender's underwriting: your credit score, income and existing debt load all factor into whether you qualify and at what rate. Someone with a thin credit file or a recent history of missed payments may not get approved for a personal loan at all, or may only qualify at rates well above the 22.95 percent average.
Weighing Which Route Fits Your Situation
Cost is not the only variable worth weighing before picking a payment method. Before committing to either path, add up all the associated costs: interest, setup fees, penalties and any other charges a lender might tack on. Then look honestly at your monthly budget. Can you comfortably absorb a $618 or $774 payment for three years without falling behind on other obligations?
It also helps to think about competing financial priorities. If you have retirement contributions, an emergency fund you are still building, or other savings goals, stretching to make a larger personal loan payment could set those goals back further than a lower cost IRS plan would. Missing payments on either option carries consequences, but defaulting on an IRS agreement can trigger additional penalties and collection action, so realistic budgeting matters regardless of which path you choose.
For most people carrying a tax bill in the $20,000 range with an average credit profile, the numbers favor sticking with the IRS installment plan. The math only flips if you can lock in a personal loan rate meaningfully below what the typical borrower is seeing right now, somewhere around 10 percent or lower. Anyone shopping for a personal loan to cover a tax bill should get actual rate quotes first, since the 22.95 percent average is just that: an average, not a guarantee of what any individual borrower will be offered.