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
A tax refund loan may come in handy when you need cash urgently and know you have the refund coming in to repay it. However, there are also a few drawbacks to consider before you decide to take out a loan.
Pros
- RALs 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, making this one of the fastest low-interest options.
Cons
- RALs come with hefty loan fees, making the total loan cost relatively high.
- Your refund could be delayed, putting you further in debt.
- You’ll typically receive a refund within a few weeks, making the loan unnecessary unless you have an emergency.
Teresa Dodson, a debt expert and the 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 typically provide tax refund advance loans. Here are a couple 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 refund advance loan is a fairly simple and straightforward process. You’ll need to file your taxes either through a tax preparation company or on your own. Next, you can check on your loan eligibility.
1. Find Out if You’re Eligible
Eligibility criteria for tax refund loans vary by lender, but in most cases, here are a few requirements you may need to satisfy:
- Credit score, credit history, and income
- Refund amount over the lender’s minimum threshold
- Terms of loan contract met
2. Apply for a Tax Refund Loan
Once you’ve determined that you’re eligible for a tax refund advance 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.
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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