Think Again if You're Thinking About Getting an Advance on Your Income Tax Refund This Year
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Think Again if You're Thinking About Getting an Advance on Your Income Tax Refund This Year

Tax refund advances, which may seem to be a good option at first, cost you much more money in fees and interest than traditional loans and credit cards

January 22, 2021

If you're short on money and know that you will be getting a tax refund this year, you may be tempted to get an advance on that refund. A tax refund advance, also called a Refund Anticipation Loan or a Refund Anticipation Check, is a very short-term loan based on your estimated income tax refund. But the fees and interest rates on them, which are often 200% or higher, should make you think twice.

Why should you Avoid Tax Refund Advances?

Tax refund advances provide taxpayers who are strapped for cash with extra money to get by until they get their refunds. While getting a tax refund advance may sound tempting, these loans are really payday loans for tax returns, and you should avoid them whenever possible. The fees on these loans are usually outrageously high and the interest charged is often three times the amount (or more) than it would be for a traditional loan. The full amount has to be repaid, just like with any other loan, even if your refund is less than anticipated or ends up being no refund at all. Though the specific fees and interest rates depend on the lender, you can generally expect to pay way too much for tax refund advances. In the end, the cost of getting an advance is simply too high.

Companies prey on low-income consumers

Payday lenders prey on people with low incomes and who are most likely to actually need the extra cash flow. Because of their circumstances, these consumers might not know why they should avoid these loans. They end up jumping into the process without knowing the true costs, which is why they end up paying some of the highest fees and interest charges. To make matters worse, some of these lenders go out of their way to make themselves seem to be affiliated with or endorsed by the federal government.

Investigate the true costs

If you're thinking about a tax refund loan, thoroughly investigate the final price tag before you commit. Just because it's not called a loan doesn't mean that it isn't a loan. And just because it's advertised as free doesn't mean it won't cost you something. Hidden fees and costs are everywhere. Even if it's 'free,' it might only be free if the the refund is received within an unreasonable number of days. You might start accruing interest or fees after a week or two, which isn't enough time to process the refund. You might also incur a fee to have any remaining proceeds sent to you as a check instead of a direct deposit. You might be assessed fees to put your advance into a check or direct deposit as opposed to on a prepaid debit card. There might even be application fees for the 'free' product.

Government shutdowns can delay returns and cost you more

The frequent federal government shutdowns might make these types of loans more attractive if you want your refund quickly, which can complicate matters. Remember that a delay in getting your refund issued won't be considered by the lender and won't release you from any obligations to repay the loan on-time. In fact, you might get hit with late fees and higher interest rates if the refund is delayed and you can't repay the loan. This could end up costing you much more than it would during other years when the government was open for business.

e-file to avoid long waits

Rather than take out a tax refund advance, file your taxes electronically and get a direct deposit into either a checking or savings account. This will usually take between 10 and 21 days. If you file using standard mail, it can take weeks or even months to get your refund.

Personal loans are better

If you're in a real pinch and need money before your refund arrives, think about using either a personal loan or even a credit card if you can afford the minimum payment. When your refund is delivered, pay off the entire bill. It becomes extremely expensive to carry a debt on a credit card, so you should always plan to pay it off both on time and in full. But credit cards, even with their high interest rates, are still cheaper than the vast majority of refund advance loans.

But I have bad credit

You may be tempted to take out a refund advance loan because you have (or think you have) bad credit and no other options. Bad credit will affect your interest rate with traditional loans, but could very likely affect your interest charges with one of these loans. Some might even charge higher fees or not even accept you. While it is true that bad credit affects your interest rates, you'll still end up paying less by getting a high-interest personal loan, even with bad credit.

Check your withholdings

While it won't help with your refund this year, think about adjusting your withholdings with your employer. If you get a tax refund, it means that too much money was withheld from your paycheck. If you increase your withholdings, your employer won't take as much money from your paycheck and you will get more money to spend today. The catch, though, is that your refund for next year will be smaller and you might end up owing a little.

It's Just not worth it

In the end, you should always avoid a tax refund advance just like any payday loan. You will almost certainly pay hundreds of dollars more than if you take out a personal loan, a line or credit, or borrow from other traditional sources. A tax refund loan really should be a last resort.