Thinking About Asking For an Advance on Your Tax Refund? Think Again
Tax refund advances should be thought of as payday loans for tax returns
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 the refund. However, the fees and interest should make you think twice before taking out such a loan.
A tax refund advance—sometimes known as a Refund Anticipation Loan or Refund Anticipation Checks—is a short-term loan that you will repay in exchange for a fee. The amount is based on the amount that you estimate your tax refund will be.
These advances provide people who are strapped for cash with enough money to get by until they get their refund. While this may make them sound tempting, in effect they are really payday loans for tax returns, and you should avoid them whenever possible.
Why Avoid Tax Refund Advances
If you need an advance on your tax refund, it is because you need cash faster than the IRS can get it to you.
The problem is that the fees on these loans are usually outrageously high and the interest charged on them three times the amount that it would usually be for a loan. And the full amount has to be repaid, just like with any other loan, even if your refund is less than you were expecting.
Though the specific fees and interest rates depend on the lender, for tax refund advances you can generally expect to pay too much: for instance, it is not unreasonable to expect at best a 10 percent interest rate and $100 fee for a $1,000 refund.
In the end, the cost of getting an advance is simply too high. And not only this, but lenders prey on those who earn low incomes and who are most likely to actually need the money. These consumers might not know why it is not in their best interest to take out such loans.
The people who need it the most are the ones who pay the most for it in fees and interest. One company even has its services offered at IRS.com, which is not the official website for the IRS (".com" denotes a company, which the IRS is not; it is a government agency, so the real website is at ".gov").
Companies Offering Tax Refund Advances
More and more companies are starting to offer either tax return advances or similar options, like lines of credit based on tax returns. Such companies include:
- US Tax Center at IRS.com
- Income Tax Advances
- H&R Block
Some of these companies are dedicated only to issuing tax advances, such as TaxAdvance.com; others, however, include the option as a feature together with other services, such as H&R Block's line of credit with Emerald Advance.
You get the same product no matter where you get the advance: a loan with high fees in exchange for your tax refund early.
Other Options for Meeting Your Financial Needs
Rather than take out a tax refund advance, think about taking steps that will make it less likely that you will need to take out such a loan.
One step you can take to make sure you get your refund as quickly as possible is to e-file. When you do this, you are able to ask for a direct deposit of the refund into either a checking or savings account, which usually takes between 10 and 21 days for state and federal refunds, respectively. If you file using standard mail, it can take weeks or even months to get your return.
Another step is to start a $1,000 emergency fund ahead of time. Starting a small emergency fund like this will provide an extra buffer and financial margin in the event you have any unexpected expenses.
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.
Are you having your taxes prepared by a tax professional? Check with him or her to see if you can pay by having his or her fees taken out of your refund. This is a common way to pay for tax preparation services, though not every preparer does it. If you're struggling to pay for the service, ask if this is an option.
Finally, think about adjusting your withholdings with your employer. If you get a tax refund, it means that you (or your employer) withheld too much from your paycheck. Your employer will not withhold as much if you increase your exemptions, which might move you closer to not receiving a refund at all. This would be ideal since in this case you would not be paying more than you owe, and you will also have more money each time you're paid. It is best to talk it over with a tax professional before you make any changes, but this could be a good option.
In the end, you should always try to find a way to avoid having to take out a tax refund advance. It is likely that you will pay too much for such a short-term loan, and you can avoid the risk by saving ahead of time, filing electronically, paying out of your refund for tax preparation fees, and adjusting your withholdings. In short, avoid tax refund advances just as you would avoid payday loans.