Time to Pay the IRS - Home Equity Loan or Credit Card

It seems like the IRS always has its hands out for a large sum of money. Unfortunately, consumers don't always have cash in ready supply. Nor are consumers always able to access cash in a hurry. Therefore, they often turn to credit cards to pay off their debts- even to the taxman.

Unfortunately, as many consumers have already discovered, credit cards can be an expensive way to pay off any size debt. It doesn't matter what the debt is or how terrific they feel once they pay the debt off using a credit card. Once the credit card bill arrives with their daily mail, that feeling of euphoria that overcomes them once they pay off a debt is going to dissipate sooner than the morning dew on a hot summer day.


Plus, if consumers use a credit card to pay off their taxes, the IRS charges an additional fee for this convenience to them. This only makes their bill even larger than it was in the first place. This fee along with the interest charges that accrue on their debt can completely exceed the late fees and penalties that the IRS might have assessed on their bill if they hadn't paid it with a credit card.

The interest rate will continue to increase the size of their debt as long as they fail to pay it off in full. Why would they pay it off in full? If they had that kind of money available, they would have been able to pay their taxes without whipping out that tiny sliver of plastic that now owns their life. Plus, the balance on the card seems to grow in leaps and bounds as one late payment turns into two and so on.

Therefore, the better option for paying off an unfortunately large tax bill once the deadline for payment arrives is to obtain a home equity line of credit, also known as a HELOC, or a home equity loan. The interest rates offered on these types of loans are typically much lower than the rates attached to credit cards.

Plus, the consumer can select the term that determines when the full payment or balance will be due by with a home equity loan. A home equity line of credit offers even more flexibility since you only use the amount of money that you need at any given time.

Both of these loans are based upon or secured by the amount of equity that the consumers have built up in their home. The home's equity is determined by subtracting the amount of money that is still owed on the home (usually, the primary mortgage along with all other secondary loan amounts) from the market value of the home. In addition to the interest fees that accrue and are added to the balance of the loan, fees are charged for obtaining the loan. Although some of the fees are required, each lender determines his or her fees, including both application fees and processing fees.

Although the addition of the interest charges and fees can increase your loan amount to more than what you would have paid to the IRS, the home equity loan allows you to pay off your tax debt immediately. Plus, in the event that you have another debt to pay off, a home equity loan can be obtained that allows you to do both.

Before coming to a firm decision, explore your options thoroughly. Determine the full cost to you with each option that you have. Determine also the length of time that you will need before you are able to repay your debt. Additionally, look at more than one type of credit card or home equity loan in order to secure the best interest rates and terms so that you can keep your expense down to a minimum.

Final Points to Ponder

Use credit cards sparingly to pay off any tax debt. A good time to use one is when you are expecting to be able to pay the bill in full when it arrives.

Obtain a home equity loan with good terms and an agreeable interest rate if you need a longer timeframe to pay off the debt. The interest rate is steady and expected.