Everything You Need To Know About Tax Refund Loans
Finding out that you’re getting a tax refund is really exciting. It’s the biggest windfall that many people get all year, after all. So far this tax season, the average refund amount is $2,902, according to the IRS. Depending on how you file and opt to receive your money back, you can expect your cash within 21 days for electronically filed returns and about six weeks for paper mailed returns.
It’s your money, though, so it’s understandable that you might want it sooner. Your tax preparer might agree with you: It is your money, so why not get it now in the form of a tax refund loan? Before you jump and say “yes,” though, it’s important to know how these loans work, because there are downsides to weigh.
What Is a Tax Refund Loan?
A tax refund loan is somewhat similar to a payday loan, which is a small loan that is meant to be repaid once you receive your next paycheck. The idea is that you will be receiving money in the near future, and a tax refund loan, or payday loan, lets you borrow against that future payment.
Tax refund loans are generally cheaper than payday loans, but that doesn’t always mean they’re affordable. Various tax preparers offer them at the same time you file your taxes, so the details of how they work may vary.
You may also know tax refund loans as tax loans, tax return loans or tax refund advance loans.
How Do Tax Refund Loans Work?
If your tax preparer offers you a tax refund loan, you’ll essentially need to hand over the keys to your tax refund. It works like this:
- Your tax preparer opens a temporary bank account for you and directs the IRS to deposit your tax refund in this account.
- Your tax preparer issues you the loan, either as a check, direct deposit or prepaid debit card.
- Your refund is direct deposited into the temporary account.
- Your tax preparer takes out any fees for the loan (typically $30 to $50), plus the cost of the tax preparation and pays you any remaining money.
- The temporary account is then closed.
How to Get a Tax Refund Loan
Tax refund loans work a bit differently from any other type of loan. You can’t pick and choose which tax refund loan you get. Rather, it’s an add-on service that tax preparers often (but not always) offer. In other words, you choose the tax preparer, and the tax refund loan you’re offered (if any) comes along with it.
This means you can’t get a tax refund loan unless your tax preparer finds out that the IRS owes you a refund. If you instead have a tax bill because you didn’t pay enough taxes throughout the year, you receive a refund and, thus, can’t get a tax refund loan.
If you think you might be getting a tax refund and you’re interested in a tax refund loan, the best way to make sure you can get one is by finding a tax preparer who offers this service.
Pros of Tax Refund Loans
- Quick cash: If you need money now and you don’t have any other options, a tax refund loan can be an affordable way to borrow cash. Just make sure you understand exactly how much it’ll cost you.
- Don’t need a bank account: It’ll take a lot longer—six weeks—for the IRS to mail you a paper check if you don’t have a bank account. Choosing a tax refund loan allows you to get that money a lot sooner, without needing a bank account.
- Don’t need to budget for repayment: Normally, you need to make sure you’ll be able to make your loan payments until the loan is paid off. But since your loan is paid off in full by money being deposited from the IRS later, you don’t need to plan for making future payments. You do not need to pay any fees directly, as this is taken out of the refund that’s paid to your tax preparer.
Cons of Tax Refund Loans
- Can be confusing to understand: Since tax refund loans aren’t something you see every day and work differently than normal loans, it can be hard to understand how they work. Many people don’t understand it’s a loan and not your actual refund, for example.
- Need to hire a tax preparer: If you file your taxes or work with a tax preparer who doesn’t offer tax refund loans, you won’t be able to get one, since only certain tax preparation companies offer them.
- Can’t compare loans very easily: Normally you can shop around for loan rates, but it’s not quite so simple since these are add-on products. Some companies advertise rates, but not all, so it’s tough to find the most affordable loan.
- Can be costly: Tax refund loans are usually cheaper than payday loans, but that doesn’t mean they’re always cheap. Furthermore, you’re paying extra to borrow what’s essentially already your own money, if you can just wait a few more weeks for it.
- May need to pay it back: Tax preparers sometimes make mistakes, and tax returns are sometimes denied or adjusted by the IRS. If this happens, it’ll alter your tax refund and you might need to pay that money back.
Tax Refund Loan Alternatives
Tax loans are short-term loans. The good news is that there are plenty of other options in this area if you’re not able to get a tax refund loan but still need to borrow money on short notice:
- Payday Advance Loan (PAL): These are short-term, payday-like loans offered by credit unions. They’re for much more affordable rates, and they help you build credit.
- 0% APR credit card: If you have good credit, you may be able to apply for a credit card with a 0% APR period. If you use it to buy something and pay it off before that 0% APR period is done, you’ve essentially gotten a free loan.
- Personal loan: Most personal loans have terms between two and seven years. If you search around, some lenders offer shorter-term loans. And, you can always take out a longer-term loan and then pay it off earlier as you’re able.
