IRS Installment Agreement vs. Personal Loan: The Ultimate Guide to Choosing the Cheapest Way to Pay Tax Debt

Okay, so picture this: You’re sitting down to do your taxes, maybe you’re expecting a nice little refund to treat yourself, and then—BAM. You owe the IRS twenty grand. Or maybe it’s ten grand. Or thirty. Whatever the number, it’s way more than you’ve got sitting in your checking account right now.

Deep breath. I know that sinking feeling is real, but here’s the good news: You’ve actually got options. And no, I’m not talking about fleeing the country or changing your identity (please don’t do that).

The two main routes most people consider when they need to pay tax debt are setting up an IRS Installment Agreement (basically a payment plan directly with the IRS) or taking out a personal loan to pay everything off in one shot. Both can work, but here’s the thing—one is usually gonna save you a whole lot more money than the other.

Here’s my take after digging through all the numbers: For most regular folks like you and me, the IRS Installment Agreement is typically the more cost-effective choice because the interest rates are generally lower. But—and this is a big but—it really depends on your personal credit profile.

In this post, I’m gonna walk you through both options, show you some real numbers using a $20,000 tax bill example (because round numbers make the math easier), and help you figure out which path makes the most sense for your wallet. And hey, if neither option works for you, I’ve got some backup plans too.

Let’s dive in!

Option 1: Understanding the IRS Installment Agreement (IA)

What an Installment Agreement Is and How It Works

Alright, so what exactly is an IRS Installment Agreement? Think of it like setting up a payment plan for anything else you might buy—except in this case, you’re buying your way out of tax debt.

Basically, it’s a formal arrangement where the IRS says, “Okay, we get it. You can’t pay this all at once. Let’s break it into monthly payments that won’t completely destroy your budget.” You agree to pay a certain amount each month over a specific period, and in return, the IRS chills out and doesn’t come after your paycheck or bank account.

Here’s the deal though: This isn’t a get-out-of-jail-free card. The IRS Installment Agreement helps you avoid the really scary stuff like wage garnishments, bank levies, or tax liens showing up on your credit report. But you’ve gotta play by their rules.

The biggest rule? You need to have filed all your required tax returns before they’ll even consider setting you up with a payment plan. So if you’ve been avoiding filing because you know you owe money, you gotta rip that Band-Aid off first.

Four Key Types of IRS Payment Plans (Structured List/Schema Data)

Not all payment plans are created equal. The IRS actually offers four different types, and which one you can use depends on how much you owe and how long you need to pay it back. Let me break it down for you:

Plan Type	Max Debt Threshold (Individuals)	Max Duration	Key Feature/Application
Short-Term Payment Plan	Less than $100,000	180 days or less	No setup fee, which is nice! But interest and penalties keep stacking up until you’re done paying.
Long-Term Installment Agreement	Less than $50,000	Up to 72 months (6 years)	Good for bigger debts; there’s a setup fee but you get way more time to pay.
Streamlined Installment Agreement	Less than $50,000	Up to 72 months	Super simplified application—usually don’t need to share all your financial details.
Partial Payment IA (PPIA)	No fixed maximum (based on what you can actually afford)	Typically up to 10 years	Here’s the wild part: whatever’s left after the collection period might actually be forgiven! But you gotta show them everything—your income, expenses, the works (Form 433-A/B/F).

The Short-Term Payment Plan is perfect if you can swing it in six months or less and want to avoid any setup fees. But most people end up going with the Long-Term or Streamlined options because, let’s be real, paying off thousands of dollars in six months isn’t realistic for most of us.

IA Pros and Cons: Interest, Penalties, and Enforcement

Like anything in life, an IRS Installment Agreement has its ups and downs. Let’s talk about both so you know what you’re getting into.

The Good Stuff (Pros):

Stops Aggressive Collection Actions: This is huge. Once your payment plan is approved, the IRS can’t start garnishing your wages, draining your bank account, or seizing your property. They basically promise to leave you alone as long as you’re holding up your end of the deal.

Reduced Penalty Rate: Normally, if you’re late paying your taxes, the IRS hits you with a 0.5% penalty every month. But when you’re on an active installment agreement and making your payments on time, that penalty drops to just 0.25% per month. It’s not nothing, but every little bit helps.

Flexible Payment: Your monthly payments are usually based on what you can actually afford to pay. The IRS isn’t trying to starve you here—they want their money, but they also know you need to, you know, live.

No Prepayment Penalty: If you suddenly come into some money (inheritance, bonus, lottery win—hey, I can dream), you can pay off the whole thing early without any penalty. This actually saves you money on interest, so it’s a win-win.

The Not-So-Good Stuff (Cons):

Interest Accrues Daily: Yeah, you read that right. Every single day you owe money, interest is piling up on that unpaid balance. It’s like a credit card that never sleeps.

Current Interest Rate: As of May 1, 2024, individuals are looking at an 8% annual interest rate. That’s the federal short-term rate plus 3%. Not terrible compared to some credit cards, but it still adds up over time.

Setup Fees: If you’re doing a long-term plan, there are setup fees. The cheapest option is $22 if you apply online and set up direct debit (automatic payments from your checking account). But if you apply by phone, mail, or in person and don’t do direct debit, you could pay up to $178. Ouch. The good news is that low-income taxpayers might qualify for a fee waiver or reduction.

Risk of Default: Here’s where you gotta be careful. If you miss payments or fail to file your tax returns in future years, the IRS can terminate your agreement faster than you can say “refund.” And then all those collection actions they were holding off on? Yeah, those come back with a vengeance.

Option 2: Paying Taxes with a Personal Loan

So what’s the other option? Well, you could take out a personal loan, use that money to pay tax debt to the IRS in full, and then you’re dealing with a bank or lender instead of the government.

The idea here is pretty straightforward: You’re basically transferring your debt from the IRS to a private lender. You get the cash, you write the IRS one big check, and boom—you’re square with Uncle Sam. Now you just owe a bank instead.

But here’s the catch: Personal loan interest rates can be brutal, especially if your credit isn’t great. The average personal loan rate as of May 2025 was hovering around 22.95% in some analyses. Let me repeat that: nearly 23%. That’s credit card territory.

The cost of a personal loan depends almost entirely on your credit profile. If you’ve got excellent credit (like 750+ score), you might qualify for rates in the single digits. But if your credit is just okay or you’ve had some bumps in the road, that rate can shoot up fast.

A word of warning: Personal loan rates tend to be significantly higher than the interest rates on an IRS Installment Agreement, especially if your credit profile is weaker. So before you jump on this option thinking it’s the easy way out, do the math. Which brings me to…

The Definitive Cost Comparison: IA vs. Personal Loan Financial Breakdown (High-Value Data)

Alright, this is where things get real. Let’s crunch some actual numbers so you can see what we’re talking about here.

The crucial insight you need to know: The IRS Installment Agreement is usually the better choice unless you can snag a personal loan with an interest rate of 10% or less. That’s the magic number. Below 10%? Maybe consider the loan. Above 10%? Stick with the IRS plan.

Let’s use our example of a $20,000 tax bill and say you’re paying it off over 36 months (3 years). Here’s what it actually costs with each option:

Option	Interest Rate/Charges Used	Monthly Payment	Total Repayment Cost	Cost Difference
IRS Installment Plan	7% Interest + 0.25% Penalty + $69 Fee	$618	$23,257	The Installment Plan is $4,595 cheaper!
Personal Loan	22.95% Interest (May 2025 Avg.)	$774	$27,852	N/A

Let that sink in for a second. Even with the IRS charging you interest AND penalties AND setup fees, you’d still save over four thousand dollars compared to taking out a personal loan at the average rate.

Your monthly payment would be $618 with the IRS plan versus $774 with the loan. That’s an extra $156 every month staying in your pocket. Over three years, that adds up to some serious cash.

Now, I’m not saying personal loans are always bad. If you’ve got killer credit and can secure a rate around 7-8% or lower, then yeah, it might make sense to pay tax debt that way and be done with the IRS. But for most people? The IRS payment plan is the winner.

Essential Alternatives to an Installment Agreement

Okay, so what if neither of these options really works for you? Maybe the monthly payments are still too high, or maybe your financial situation is just… rough right now. Don’t panic. There are a few other roads you can explore:

1. Offer in Compromise (OIC):

This is the “settle for less” option. If you can prove to the IRS that you genuinely can’t pay the full amount you owe—like, it would create serious financial hardship—they might let you settle your debt for less than what you actually owe.

Sounds great, right? Well, it’s not easy to qualify for. You need to fill out Form 656 and provide detailed financial statements showing your income, expenses, assets, everything. The IRS basically wants to see that squeezing the full amount out of you would be like trying to get blood from a stone.

But if you do qualify, it can be life-changing. Just know that it’s a rigorous process and most applications get rejected, so it’s worth talking to a tax professional about whether this is realistic for your situation.

2. Currently Not Collectible (CNC) Status:

This one’s for when paying your tax debt right now would literally prevent you from covering basic living expenses. We’re talking rent, food, utilities—the essentials.

If you can prove financial hardship, the IRS can put your account in CNC status, which basically means they pause collection actions. No payment plan, no levies, they just… wait.

BUT (and this is important): Interest and penalties still keep piling up. Your debt is growing while you’re in CNC status. Plus, the IRS can file a tax lien, which hits your credit. And they’ll periodically review your finances to see if your situation has improved. Once it does, they’ll expect you to start paying again.

Think of CNC status as hitting the pause button, not the delete button.

3. Penalty Abatement:

Sometimes you can actually get the IRS to reduce or completely remove penalties (and sometimes even interest) if you’ve got a good reason for why you couldn’t pay on time.

Good reasons include things like serious illness, natural disasters, loss of financial records due to circumstances beyond your control—basically stuff that wasn’t your fault. There’s also something called First-Time Penalty Abatement (FTA), which is exactly what it sounds like: if you’ve been a good taxpayer up until now and this is your first time messing up, they might cut you some slack.

It doesn’t hurt to ask, especially if you’ve got legitimate reasons for falling behind. The worst they can say is no.

Step-by-Step: Setting Up Your IRS Payment Plan (Application Process)

Alright, so you’ve decided an IRS Installment Agreement is the way to go. Smart choice! Here’s exactly how to set it up without losing your mind in the process:

Step 1: Determine Eligibility and File Returns

First things first—make sure all your past-due returns are filed. I know, I know. If you owe money, the last thing you want to do is file returns that are gonna show more debt. But the IRS won’t even talk to you about a payment plan until you’re current on filing.

Then check how much you owe against the plan limits. Remember, Streamlined Installment Agreements are for $50,000 or less, Short-Term plans are for under $100,000, and so on. Know which category you fall into.

Step 2: Choose the Right Plan

Based on your debt size and how long you need to pay it off, pick your plan type. Need six months or less and owe under 100K?Short−Term.Needuptosixyearsandoweunder50K? Long-Term or Streamlined. Can’t afford to pay the full amount even over time? Look into Partial Payment IA.

If you’re not sure which one makes sense, the IRS has people who can help (I know, shocking), or you can talk to a tax pro.

Step 3: Submit Your Application

You’ve got options here:

Online (Easiest): Use the IRS Online Payment Agreement (OPA) tool. It’s actually pretty user-friendly, and it’s the fastest way to get approved. Plus, you can do it in your pajamas at 2am if that’s your thing.

By Mail: Submit Form 9465 (Installment Agreement Request). If you owe more than $50,000, you’ll also need to include Form 433F with all your financial info.

Step 4: Optimize Payment Method

Here’s a pro tip that’ll save you money right off the bat: Set up Direct Debit (automatic payments from your checking account).

Why? Because the setup fee for direct debit is way cheaper. If you apply online with direct debit, you only pay $22. But if you do non-direct debit, you could pay up to $69 online or $178 if you apply by phone, mail, or in person.

Plus, with automatic payments, you won’t forget to pay and accidentally default on your agreement. Win-win.

Conclusion: Timely Action for Financial Control

Look, I get it. Dealing with tax debt is stressful and not exactly fun dinner conversation. But here’s the thing: taking action now—even if it’s scary—is way better than ignoring it and letting the problem snowball.

Before you choose between an IRS Installment Agreement or a personal loan to pay tax debt, sit down and actually calculate the total costs. Look at interest rates, penalties, and setup fees for both options. Run the numbers for your specific situation, not just the averages I’ve shared here.

The key to managing tax debt is picking the right plan for your unique financial situation and making sure your application is accurate and complete. A mistake on your application could delay everything or even get you denied, so take your time and do it right.

My honest advice? Because this stuff can get complex and mistakes can be crazy expensive, it’s often worth consulting with a tax professional or attorney. Yeah, it costs money upfront, but they can help you secure the best possible terms, avoid common pitfalls, and make sure you don’t accidentally default down the road.

At the end of the day, the IRS just wants their money. They’re not trying to ruin your life (even if it feels like it sometimes). Work with them, set up a plan that actually works for your budget, and stick to it. Future you will be so grateful you handled this like an adult instead of ignoring those scary letters.

You’ve got this! And remember—thousands of people set up IRS Installment Agreements every year and successfully pay off their debt. You can absolutely be one of them.