You May Want to Worry about Tax Refund Advance Loans

Many tax filers are owed a refund from the Internal Revenue Service each year. Unfortunately, some of those tax filers can’t wait to get this money from the government because they have pressing expenses or bills to pay.

Recognizing that many taxpayers are eager to get their refunds early in the tax season, some tax preparers offer tax refund advance loans, also known as tax refund anticipation loans, to provide refunds to customers faster.

While tax refund loans may seem like a good idea, it’s actually a bad idea to take these loans in most cases. This guide to tax return loans will explain how these loans work, as well as their advantages, risks, and downsides — and what other financing options you should consider if you’re in a financial pinch.

In this guide:

• What Are Tax Refund Advance Loans?
• Who Offers Refund Anticipation Loans
• Benefits of Using a Tax Refund Loan
• Downsides of Using a Tax Refund Loan
• Alternatives to Tax Return Loans

What Are Tax Refund Advance Loans?

You may be owed a refund if you overpaid your taxes by having too much withheld from your paycheck throughout the year. If you’re entitled to tax credits, such as the Earned Income Tax Credit (a credit for lower-income taxpayers, also known as EITC) or Child Tax Credit (a credit for caregivers of dependent children), you may also be entitled to a refund — sometimes even for more money than you’ve paid in federal taxes during the year.

Unfortunately, it can take time to get your refund. In fact, if you claim the EITC or Additional Child Tax Credit, the IRS was required by law to hold your refund until at least the middle of February. In 2019, the earliest that people who claim these credits could expect their refund was Feb. 27, 2019.

Tax refund loans are aimed at taxpayers who want to get their refund money right away instead of waiting for it. Tax refund loans are short-term loans that are secured by the estimated refund you’re due.

When you take one of these loans, you get the money upfront when filing your taxes and your refund is then generally sent directly to the lender. However, you may have to pay the company making the loan a tax preparation fee, in addition to any interest and fees you’ll pay on the tax refund loan itself.

You should carefully consider the pros and cons of taking out a tax refund loan before deciding whether it is the right financial choice for you.

Who Offers Refund Anticipation Loans

Tax refund anticipation loans are offered by several of the best tax software companies, including:

• H&R Block
• TurboTax
• Jackson Hewitt Tax Service

Benefits of Using a Tax Refund Loan

Here are a few key benefits of using tax refund loans:

• You can qualify for these loans easily: As long as you meet basic eligibility criteria, such as having a large enough refund, you should be able to get approved for a refund anticipation loan or refund advance.
• You can access your refund much more quickly: These loans accelerate the process of getting access to the money you’re owed by the IRS. You don’t have to wait weeks for the money you need — you may be able to access the loan amount within just days of filing your return.
• You won’t have to worry about making loan payments: The money you’re borrowing will usually be delivered directly to your lender from the IRS in the form of your actual refund, so you won’t have to worry about making on-time payments or repaying the loan in full on your own.

Downsides of Using a Tax Refund Loan

Unfortunately, there are also some major disadvantages associated with tax refund loans:

• You will have to pay fees and interest: Despite how it may seem, you’re not actually getting a “free loan” or getting money from the IRS faster. These loans are just like any other loan — you pay a privilege for borrowing. You just pay for the loan in a different way. The fees and interest you owe will reduce your overall refund amount.
• You could end up incurring additional costs: If your tax refund is delayed, you could be charged additional interest and fees by your lender.

If you file taxes online and sign up for direct deposit — and your refund is not held for longer because you are claiming the EITC or Additional Child Tax Credit — you can usually get your refund in your bank account in as little as 21 days, especially if you e-file. Consider whether it makes sense to pay the costs associated with a refund anticipation loan instead of just waiting until your income tax refund comes in.

Alternatives to Tax Return Loans

Instead of taking out a tax return loan, here are some other options you might want to consider:

• You could try to work out a payment plan or get an extension. If you’re counting on your refund to pay certain bills, try talking with your creditors. They may be willing to give you a payment extension or allow you to work out a payment plan if they know your refund is on the way.
• You could use an existing credit card. If you have expenses to pay now, consider putting them on a credit card. You won’t have to pay interest on purchases if you pay the charges off when your statement comes.
• You could sign up for a new credit card. You might also consider signing up for a credit card that offers an introductory 0% APR for a specified period of time. Provided you pay the balance in full as soon as you receive your actual tax refund, you won’t be saddled with additional interest or fees.

You should consider all of the options available to you before you get a refund anticipation loan and lose some of your refund money to fees and interest.

Bottom Line: Is Getting a Tax Refund Advance a Good Idea?

Your tax refund is money you’re entitled to because you’ve overpaid the IRS or because of credits and deductions you’re entitled to claim. You should not want to lose a portion of this refund to the costs associated with a refund anticipation loan unless you have no other option.

Whenever possible, look into alternative sources of financing — or try to wait for your refund — instead of borrowing and reducing the amount of money you get back from the IRS.

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