Can you use a personal loan for tax debt?

When you apply for a personal loan with a bank or similar lender, they will assess your application based on your income and expenses, your credit score, and other relevant factors. The loan’s purpose will also play an important role – you might apply for a personal loan to buy a car, pay for a wedding, go on a holiday, or to consolidate outstanding debts.

If you want to borrow money to repay an ATO debt, a bank may be concerned that if you can’t afford to pay your taxes, you won’t be able to repay a personal loan either. Providing a loan to a borrower who can’t afford the repayments may violate the lender’s responsible lending obligations under Australian law.

Banks and lenders may learn about your tax debts when assessing your application. Since 2019, the ATO has been able to report tax debts (including business tax debts) to credit reporting agencies. This means your lenders could learn about your tax debts when conducting a credit check for your personal loan application.

Not all lenders will automatically deny you a personal loan based on your tax debts. Different lenders may have different risk appetites, and may also consider your personal and financial situation, including how much you owe and how much you want to borrow, before making a final decision.

You still may not be able to take out a personal loan to pay for the tax debt itself. But in some circumstances, you may be able to apply for a personal loan to cover other separate expenses (such as to buy a car) while you also keep paying off the tax debt. This of course relies on you being able to afford to service both debts at once, which may be easier said than done.

Remember that the interest rate you are charged on a personal loan is typically based on your credit score and the level of financial risk you represent to the lender. Taking steps to improve your credit score, or securing your loan with the value of another asset (such as a car, equity in a home, or cash saved in a term deposit) could potentially reduce these risks and help lower your rate.

According to the ATO, some of your options if you owe a tax debt include:

• Making a payment plan
• Entering into a compromise
• Deferring repayments

If you don’t pay your debts to the ATO, and they’re unable to get in touch with you, they may engage a debt collection agency to recover the debt.

To manage a tax debt, consider contracting the ATO directly to discuss the options available to you in your present circumstances. A financial counsellor may also be able to provide valuable advice.