Think Again if You're Thinking About Getting an Advance on Your Income Tax Refund This Year
Tax refund advances, while seem to be a good option at first, cost you much more money in fees and interest than traditional loans and credit cards
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. A tax refund advance, also called Refund Anticipation Loans or Refund Anticipation Checks, is a short-term loan based upon your estimated tax refund. But the fees and interest rates, which are often 200% or higher, should make you think twice.
Why Avoid Tax Refund Advances
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, they 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 loan. The full amount has to be repaid, just like with any other loan, even if your refund is less than anticipated. Though the specific fees and interest rates depend on the lender, you can generally expect to pay 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
Lenders prey on people with 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 and jump into the process without knowing the true costs, which is why they end up paying the most in fees and interest charges.
One company even has its services offered at IRS.com, which is not the official website for the Internal Revenue Service (IRS). While not illegal, it is nevertheless confusing and potentially deceptive.
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 a tax refund advance isn't a loan. And just because it's advertised as free doesn't mean it won't cost you. 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 shutdown may delay returns and cost you more
The ongoing federal government shutdown 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 where 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.