How a Tax Refund Loan Works and How to Get One
6 MIN READ
Published October 12, 2023 | Updated November 14, 2023
If you’re expecting a tax refund from the IRS but are currently managing tax debt and need money now, you may be able to get a tax refund loan. A tax refund loan is a short-term loan that you can repay from your refund. You’ll usually get money within a day. Tax preparation services usually offer the loan, but they may charge tax preparation costs, fees, and interest charges, which may add up to be quite expensive.
What Is a Tax Refund Loan?
Tax refund loans 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. You’ll usually be able to 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 is issued. Loans are usually dispersed quickly in a bank account or a prepaid card.
How Do Tax Refund Loans Work?
You can apply for a tax refund loan when you’re filing a tax return with a tax preparer. The loans usually don’t have any credit score requirements, 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 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 preparation fee, which can be anywhere from $40-$80.
- There may be a loan application fee, which can sometimes be as high as $100.
- If your service involves setting up a temporary bank account, there may be a refund account fee of approximately $30.
- There may be a check processing fee of $20.
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 from 36%.
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 36% 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
A tax refund loan may come in handy when you need cash urgently and know you have the refund coming in to repay it. But, there are a few drawbacks that you should be aware of before you decide to take out the loan.
- These loans usually don’t involve a credit check.
- You’re essentially borrowing the money from yourself against the refund you’re expecting.
- You’ll typically get access to cash within one business day. If you need money urgently, this can be one of the fastest options.
- You’ll only be able to get the loan if you file your taxes through a tax preparation company.
- There may be hefty loan fees and annual percentage rates (APRs), making the total loan cost quite high.
- If your refund is delayed, you may end up with a lot of debt.
Debt expert and founder of Greenbacks Consulting believes consumers are better off forgoing a tax refund loan if at all 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 offer tax refund advance loans. Here are three companies that currently offer this option.
1. H&R Block
- Loan amount: $250 to $3,500
- Tax preparation fee: Starts from $85
- Minimum tax refund amount: $250
- Interest rate: 0%
2. Turbo Tax
- Loan amount: $250 to $4,000
- Tax preparation fee: Free for simple tax return filings
- Minimum tax refund amount: $500
- Interest rate: 0%
3. Jackson Hewitt
- Loan amount: $500 to $3,500
- Tax preparation fee: NA
- Minimum tax refund amount: $500
- Interest rate: 34.22%
Steps To Getting a Tax Refund Loan
Getting a refund advance loan is a fairly simple, straightforward process. You’ll need to file your taxes through a tax preparation company and check if you’re eligible for the loan.
1. Find Out if You’re Eligible
The eligibility criteria for tax refund loans vary by lender, but in most cases, here are a few criteria you may need to satisfy:
- You must have your taxes prepared by a tax preparation provider.
- You must e-file your tax returns.
- The lender may consider your credit and income information to determine your eligibility.
- Your refund amount must be over the lender’s minimum threshold.
- You must agree to the terms and conditions of the lender.
2. Apply for a Tax Refund Loan
Once you’ve determined that you’re eligible for a tax refund loan, you can apply for it when you file your taxes. Your tax preparer may offer you a loan, and if you agree, you’ll need to pay the applicable fees. 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.
What Are the Alternatives?
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 for a few days to receive your full refund amount without any charges or fees. If you’re in need of money now, here are a few alternatives to explore.
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 vary from 6% to 36%, but if you have an excellent credit score and little debt, you may be able to get the lowest rates.
You can also get a short-term emergency loan, which is usually a payday 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 cash within one business day. You may be able to qualify for the loan even if you have a lower credit score.
The Bottom Line on Tax Refund Loans
Tax refund loans may be a good option for those who have filed their taxes and are expecting a refund. This may also be a good option 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. You may pay a hefty fee 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 advance, credit cards, and personal loans.