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A tax refund advance loan may allow you to receive a portion of your expected income tax refund before filing your taxes. But before you choose this option, read on to decide if it’s right for you.
What’s a tax refund advance loan?
A tax refund advance loan, also known as a refund anticipation loan (RAL), is a loan that allows you to borrow a percentage of your anticipated tax refund and repay it with your refund once the IRS processes your tax return.
Tax preparation companies typically offer these loans, and they work by estimating the amount of your tax refund based on your income and other factors. Once approved for the loan, you’ll receive the funds in a matter of days, allowing you to use the money to cover bills, make purchases, or handle other financial needs.
How to get a tax refund advance loan
If you’re considering a tax refund advance loan, it’s crucial to understand how the process works. Here’s a look at the steps to take:
- Find a tax preparation company that offers tax refund advance loans. Many national tax preparation companies offer this service.
- Provide information to prepare your return. This includes your Social Security number and information on your dependents, income, deductions, and tax credits.
- Wait for the tax preparation company to prepare your return and offer you a loan. They’ll offer you a loan for a portion of your expected refund — usually up to a few thousand dollars. Read the terms and conditions of the loan carefully to understand how it works, any interest or fees involved, and your repayment obligations.
- Decide whether to accept the loan. You’ll typically receive the funds in a matter of days. The loan will be paid in one lump sum via direct deposit to your bank account or a prepaid debit card.
- Repay the loan. Typically, your refund will be deposited into a temporary bank account set up in your name. The lender will withdraw the loan balance plus any interest or fees. Any remaining balance goes to you, either via direct deposit into your account or on a prepaid card.
How much can you borrow with a tax refund advance loan?
The amount you can borrow with a tax refund advance loan depends on a few factors, including your anticipated refund, the RAL program requirements, and your credit score.
The loan amount is usually a percentage of your refund. The tax preparation company will take out the tax preparation service charge and any applicable loan fees.
For example, you might be able to borrow $250 based on an expected federal refund of $500 to $999, according to TurboTax. The amount you can borrow depends on your unique situation and the lender’s policies.
Where can you get a tax refund loan?
Many tax preparation services and do-it-yourself tax software providers offer these loans. Here are a few to consider:
- H&R Block
- TurboTax
- Jackson Hewitt
- ATC Income Tax
- TaxAdvance.com
However, some of these companies only offer refund advance loans early in the tax season, often January to February each year.
How much does a tax refund advance loan cost?
While tax refund advance loans may seem like a convenient way to access a portion of your anticipated tax refund, it’s important to understand the costs involved. Some tax preparation services offer refund advance loans with no fees or interest, but you’re typically required to have them prepare your tax return, and they may charge a fee for that.
The exact costs of a tax refund advance loan will depend on the lender you choose, the amount you borrow, and the length of the loan. In general, however, you can expect to pay fees ranging from $30 to $50.
While that might seem like a relatively small fee, it’s pretty stiff when you look at the short time period. For example, borrowing $500 for two weeks with a $50 fee works out to an APR of approximately 250%.
Another factor to consider when calculating the cost of a tax refund advance loan is the impact it could have on your actual tax refund. If there’s a mistake on your return and your actual refund is less than expected, you’re responsible for paying back the difference out of pocket, which could create additional financial strain.
Eligibility requirements for tax refund loans
Eligibility for tax refund advance loans varies from provider to provider, but here’s an overview of some standard requirements:
- Age: Most lenders require you to be at least 18 years old and have a Social Security number.
- Minimum refund amount: Many lenders require a minimum estimated refund of at least $500.
- State of residence: Some lenders don’t offer refund anticipation loans to residents of certain states.
- Electronic filing: Typically, you must e-file your return with the tax preparation service or software to qualify for a loan. If you plan to use a different tax preparation service or file your taxes yourself, you may not be eligible for a loan from these providers.
- Income: Lenders may require you to have certain kinds of payment, such as salary or wages on a W-2, retirement benefits reported on a 1099-R, or self-employment income on Schedule C or C-EZ.
- Open a bank account: Some companies require you to open a checking account with their preferred bank and have your tax refund direct deposited into that account.
- Credit score: Some tax refund advance loan providers check your credit score for eligibility purposes, and some may even require you to have a minimum credit score to qualify for the loan.
Benefits and drawbacks of tax refund advance loans
While tax refund advance loans offer flexibility and convenience, they also come with certain risks. Here are some of the benefits and drawbacks of these loans:
Pros
- Quick access to money: If you need cash quickly and don’t want to wait for your tax refund, you can get an advance on your refund — sometimes within minutes of the IRS accepting your e-filed tax return.
- No collateral required: Other than your tax refund, you won’t need to put up collateral, such as your car title.
- May help you avoid costly overdraft fees and other late payment penalties: If you need money quickly to pay a bill or cover an upcoming draft from your bank account, a RAL can be a quick way to get money in your bank account.
Cons
- Difficult to compare offers from different lenders: Typically, companies that offer tax refund advance loans require you to have your tax return prepared by them before they will tell you whether you’re approved for a loan and how much you can borrow. This makes it difficult, if not impossible, to compare offers from multiple companies.
- You may not qualify: If your anticipated refund is small or you have poor credit, you may not be able to get a refund anticipation loan.
- Higher interest rates and fees than other types of loans: While some RAL providers don’t charge interest or fees, others do. And on a short-term loan, even a seemingly small fee translates into a very high APR.
What are some alternatives to tax refund advance loans?
If you’re considering a tax refund advance loan but are unsure if it’s the right fit, here are a couple alternatives that can help you get cash quickly:
- Personal loan: These loans are typically unsecured and have lower interest rates than credit cards. You repay the loan in fixed monthly installments, with a set repayment term.
- Credit card advance: A credit card advance allows you to borrow money from your credit card company, often at a high interest rate. While this may not be the most affordable option, it could be an alternative to refund anticipation loans for those who don’t meet the eligibility requirements.
- Peer-to-peer loans: With a peer-to-peer loan, you borrow money from other individuals rather than a traditional financial institution. These loans are facilitated through online platforms that match borrowers with investors willing to lend money. Peer-to-peer loans can be an alternative to refund anticipation loans for borrowers with less-than-perfect credit.
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