Turbo Takeaways
- Tax preparation services usually offer a tax refund advance loan.
- Consumers typically receive the money from a tax refund loan within a day, making this option attractive to those who need quick funding.
- These loans often come with additional costs, including preparation fees and interest charges, which can make the loan quite expensive.
What Is a Tax Refund Loan?
Tax refund anticipation loans (RALs) are short-term loans that you repay with your tax refund. The loans are offered by companies providing tax preparation services and are usually available from December to February each year during the tax season.
With a RAL, you'll get a portion of the refund you expect as a loan, depending on the lender. The amount you borrow will then be deducted from your tax refund when it's issued. These loans are usually dispersed quickly into a bank account or on a prepaid card.
How Do Tax Refund Loans Work?
You can apply for a tax refund anticipation loan when you’re filing a tax return with a tax preparer or after you've completed the process on your own. Typically, tax refund anticipation loans don't require a certain credit score, but the lender may review other details to determine your eligibility, such as your expected refund, identity verification, and tax history.
Once your application is approved, you’ll be able to access the loan funds, usually within a day, through your bank account or on a prepaid card. When the IRS releases your tax refund, the tax preparer will deduct the interest and loan amount from the refund.
Interest Rates and Fees
Tax refund loans come with a number of fees. These may include:
- Tax preparation fee, which can be anywhere from $25-$90
- Loan application fee
- Refund account fee
- Check processing fee
Depending on the tax preparer, you may be able to get a 0% interest loan. If your tax preparer charges an interest rate, it may start around 3%.
True Costs of a Tax Refund Loan
Tax refund anticipation loans come with a number of fees, including preparation, loan application, refund account setup, and check processing.
Tax Refund Loan Costs
So, how much does a tax refund loan cost? Let’s look at an example to get a better idea.
Let’s say you want to get a $1,000 tax refund loan against your upcoming tax refund. You’ll need to pay a tax preparation fee of $80 to get the loan. Additionally, you may have to pay prepaid card fees of $30. The lender also charges an interest rate of 3% on the loan, and you’re expecting to repay the loan after one month when your tax refund arrives.
Here’s how much the loan may cost you:
- Tax preparation fee: $80
- Prepaid card fees: $30
- Interest: $30
You’ll pay a total cost of $140 for a $1000 loan for one month.
Pros and Cons of Tax Refund Loans
Pros
- Usually don’t involve a credit check
- Lets you borrow against your expected refund
- Very fast access to cash, often within one business day
Cons
- Hefty loan fees, making the total loan cost relatively high
- Possible delays or issues with your refund
- Often unnecessary if your refund will arrive within a few weeks
A tax refund loan can be tempting if you need cash quickly and are confident your refund is on the way. However, the additional fees and risks mean it’s worth thinking carefully before deciding to take out a loan.
Teresa Dodson, a debt expert and founder of Greenbacks Consulting, believes consumers are better off forgoing a tax refund loan whenever possible. “If you can wait for your refund and skip the additional fees you may get charged for the loan, do it. It's your money, keep it,” Dodson says.
Where To Get a Tax Refund Loan
Tax preparation companies typically provide tax refund advance loans. Here are a couple of companies that currently offer this option.
| Provider | Loan Amount | Tax Preparation Fee | Minimum Tax Refund | Interest Rate |
|---|---|---|---|---|
| H&R Block | $250 to $3,500 | From $89 | Unspecified | 0% |
| Intuit TurboTax | $250 to $4,000 | From $89 | Over $500 | 0% |
| Jackson Hewitt | $250 to $6,500 | From $25 | At least $2,600 to qualify for $1,000 | 0% For no-fee refund advance 35% For early advance |
Steps To Getting a Tax Refund Loan
Getting a tax refund advance loan is a fairly simple process. You’ll file your tax return, see whether you qualify, and then complete a short loan application with the participating provider.
Step 1: File Your Tax Return
Start by filing your taxes, either through a tax preparation company that offers refund advance loans or using tax software that partners with a lender. Your expected refund amount is the basis for how much you can borrow.
Step 2: Find Out if You’re Eligible
Eligibility criteria for tax refund loans vary by lender, but in most cases you may need to meet requirements such as:
- Credit profile, income, and ID verification
- A refund amount above the lender’s minimum threshold
- Agreement to the lender’s fees and loan terms
Step 3: Apply for a Tax Refund Loan
Once you know you’re eligible, you can apply for a tax refund advance loan when you file your taxes. Your tax preparer or the partner lender will present the loan offer, including all applicable fees and charges.
The tax preparer may set up a temporary bank account or provide a prepaid debit card for you if you’re eligible. The loan amount will be deposited in your account directly. All fees and charges will be deducted from the income tax refund amount, and the remaining amount will be paid to you.
For accurate information on when to expect your refund or how to check its status, visit the official IRS website.
What Are the Alternatives?
If you can wait for your refund and skip the additional fees you may get charged for the loan, do it. It's your money, keep it.
While a tax refund loan can give you quick access to cash, it can be an expensive option. Your best option may be to simply wait to receive your full refund amount without any charges or fees. If you’re in need of money immediately, here are a few alternatives to explore:
Personal Loans
Some online lenders and financial institutions offer small personal loans as quickly as a tax refund loan. You can prequalify for a personal loan online and may get next-day funding if approved. Interest rates on personal loans vary from 6% to 36%, but if you have an excellent credit score and little debt, you may qualify for the lowest rates.
Emergency Loans
You can also opt for a short-term emergency loan, a payday loan alternative that doesn’t cost as much in interest. Many lenders offer emergency loans with a credit check, and funding is fast, so you can get the cash you need within one business day. Plus, you may qualify for the loan even if you have a lower credit score.
Are Tax Refund Loans Worth It?
Tax refund anticipation loans may be a good option for consumers who've filed their taxes and are expecting a refund, but need the money immediately. Using a RAL can also be a suitable choice for those who don’t qualify for a personal loan but need funds right away.
Keep in mind, though, that these loans come with fees and interest charges, so you may end up paying a high cost to get your tax refund sooner.
If you want to get your full refund without paying any fees, it’s best to wait until the IRS issues your refund or explore alternatives like cash advances, credit cards, and personal loans.
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