Home > 2014 > Personal Loans > Can You Use a Peer-to-Peer Loan to Pay Your Taxes?

Can You Use a Peer-to-Peer Loan to Pay Your Taxes?

Advertiser Disclosure Comments 0 Comments

As the April 15 income tax deadline draws nearer, it’s increasingly risky to put off thinking about how you’re going to come up with the money to pay your taxes. If the money hasn’t magically materialized in your checking account, it’s time for a Plan B.  Or maybe you owe quarterly taxes, and a big client’s project will be completed at the end of April, and that’s when you’ll get paid — assuming things go as scheduled.

You can pay with a credit card, but you will pay a “convenience fee” of 1.89% to 2.49%. (Still, with some rewards cards, you can come out ahead, but only — and this is incredibly important — if you pay off the entire balance. And if you’ve waited to file because you weren’t sure where the money would come from, chances are that’s not you.)

There’s a kind of personal loan, though, that many of us haven’t considered: peer-to-peer lending. The two big players in this space are Prosper and Lending Club. A borrower goes to these sites, creates a listing, and then other users can opt into funding your loan. They make money on the interest you pay on the loan, and you cut out the middle man.

A peer-to-peer loan can work especially well if you plan to use the money as a bridge loan — just until your anticipated bonus or freelance payment comes in, says Propser President Ron Suber.  He said there are upticks in activity when quarterly taxes are due.

“Many people know a bonus or commission coming, and they take out a loan anticipating paying it off before it’s due,” Suber says. He said a good number of clients also use personal credit to borrow or pay taxes for a small business. With excellent credit, rates on peer-to-peer loans can be significantly lower than those of credit cards, though, and if the hoped-for bonus or commission is later or smaller than anticipated, the rate is fixed. And if you get paid as you expected, there’s no pre-payment penalty. But it’s worth considering whether you are willing to spend the next three years paying taxes owed for 2013; if that’s the case, it may be time to adjust your withholding.

As with traditional personal loans, borrowers have to submit documents (you may have all or most of them at your fingertips from doing taxes), and their credit scores determine what the interest rate will be. But loans can be funded in less than a week after documents are received. There are also fees for funding the loans, and those vary by borrower’s credit scores. Both Lending Club and Prosper.com can give you a rate based on credit, and you can at least get an idea of where you stand by accessing your free credit scores, which you can do through Credit.com. The scores the peer lenders use may not be exactly the same as your free scores, but you should have an idea of roughly where you stand before you decide whether to apply.

As tax time draws nigh, it’s one more way to deal with a bill that’s bigger than you expected. But you can’t wait until April 14 to get started.

More on Managing Debt:

Image: Helder Almeida

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.