Arrangement vs loan cost check

How to read the result

The arrangement figure is the extra interest IRD is likely to add while you pay the balance off, based on what it has actually added recently. IRD calculates use-of-money interest daily; it doesn't compound and it's deductible for business purposes (IRD). Late payment penalties stop while you keep to an arrangement, so they aren't added to the estimate, but if the arrangement is cancelled for default, penalties can be charged back as if it never existed.

The loan figure is simply the total cost of finance from a written quote. Once IRD is paid, IRD's penalties, interest and enforcement on that debt end. Property-secured loans run from $20,000 to $5,000,000; cash-flow options are typically $5,000 to $500,000.

When the numbers are close

Let risk decide. If your income is steady and the arrangement is short, the arrangement is often the sensible choice. If income is lumpy, the balance includes PAYE, IRD has declined a plan, or a deadline is running, the certainty of paying in full is usually worth more than a small dollar difference. Many businesses use both: a loan for the riskiest part, an arrangement for the rest. Read payment plan vs loan and the guide instalment arrangement, tax pooling or a loan?

Getting the inputs right

• Balance: the total on your myIR statement of account, including penalties and interest already charged.
• Recent interest: add up the interest lines for the last three months. If the balance changed a lot in that time, the estimate will be rougher.
• Months: be realistic. IRD prefers arrangements as short as possible, and a plan that's too short is more likely to break. See instalment arrangements.
• Loan cost: ask for the total dollar cost in writing, including every fee.