Tax Refund Loans: Pros, Cons And How To Get A Tax Refund Advance

Filing your yearly tax return can be time-consuming, but getting a tax refund can make it well worth the effort. In fact, if you have big plans for your refund money and are in a hurry to receive it, you might consider pursuing a tax refund loan as an advance payment. However, this option has some downsides, including some fees and a high annual percentage rate (APR).

Let’s take a closer look at tax refund loans, how they work, and the pros and cons of using one.

A tax refund loan is a short-term advance on your tax refund. Also called a tax refund advance loan or refund anticipation loan, a tax refund loan is typically in the $200 – $4,000 range. But how big of a loan you can get depends on your expected tax refund amount as determined by your tax preparer.

A tax preparer typically lets you borrow only a percentage of the full tax refund amount in case the Internal Revenue Service (IRS) finds an issue with your tax return and doesn’t approve the refund amount you’re expecting.

Taxpayers must file their tax return to even be considered for this type of financing. Your tax preparer must also determine that you’re due a refund for the previous year’s taxes. If you owe taxes instead, you won’t be eligible for a tax refund loan. So, if you want a tax refund loan, you’ll need all the information and forms – such as W-2s or 1099s – required to file your annual income tax return.

A tax refund loan works like a payday advance, except you use your tax refund as collateral instead of using your paycheck as collateral. When you’re ready to file your return, your preparer sets up a temporary bank account for the IRS to deposit your refund into.

With your anticipated refund total in mind, your tax preparation service – now your lender – will approve you for a certain loan amount. Your lender – that’s your tax preparer – will give you the funds as a check, a prepaid debit card or a direct deposit into your bank account.

Once the lender receives your tax refund from the IRS, they’ll disperse the funds to you – minus your loan amount and any fees associated with the loan. The temporary bank account is closed, and your loan is repaid in full.

Tax preparers and tax-filing companies commonly offer refund advances. You may see payday lenders offer similar services, too, but they’ll likely be much more expensive.

For instance, Jackson Hewitt offers an early tax refund loan with an APR of 35.53%. Payday loans, on the other hand, have an average APR of 398%. As you can see, a borrower would pay significantly more interest with a payday loan.

Most tax preparation companies offer tax refund advances as an additional service between December and February.

Getting a tax refund advance is fairly straightforward, even though it doesn’t work like a traditional installment loan. Most notably, you don’t need to get prequalified, and you won’t have to make monthly payments afterward.

Once you find a tax preparer that offers a tax refund advance, it’s best to find a few other preparers that offer this service. This way, you can compare them and choose the one with the lowest APR. Just keep in mind: Not all companies advertise their interest rates or fees.

Once you settle on a tax preparation service, are ready to file your tax return and have been approved for a refund advance, your tax preparer will set up the aforementioned temporary bank account and disperse the loan funds using your desired method of payment.

As with any type of financing, a refund anticipation loan comes with its own risks and benefits. Here’s a quick summary of both, followed by a more in-depth look, to help you assess whether this type of loan could work for you.

Pros Of Tax Refund Loans

Perks of a tax refund loan include:

• You can get your money quickly. Most refund advances have a quick turnaround time. Lenders could make funds available within a few business days.
• You won’t have monthly installments. Since the lender will be repaid once the IRS deposits your refund, you won’t have to make monthly payments.
• You don’t need a bank account. If you don’t have a bank account, your lender can give you a prepaid card or check instead of a direct deposit.
• You don’t need to meet strict eligibility requirements. Refund advances tend not to carry the same requirements as most loans. If you have poor credit, a refund advance could be ideal.

Cons Of Tax Refund Loans

Now for the downsides of refund advance loans:

• You have to use a tax preparer. Since your tax preparer will also be your lender, you’ll have to hire someone to file your tax return rather than potentially doing it yourself.
• You’ll have a high interest rate. A refund advance typically means paying tax preparation fees and a high interest rate. The interest rate will likely be low compared to what you’d find with a payday lender.
• You might have to pay more if your refund is smaller than expected. If your anticipated refund amount is incorrect, you may have to make a lump-sum payment to your lender to pay off the rest of your loan. You can typically avoid owing money if your tax refund loan is only a modest percentage of your anticipated tax refund. This allows for some wiggle room in the event that your actual refund is less than expected.
• You’ll need to watch out for tax refund loan scams. Many scammers use promises of maximizing your refund, or advance, to entice you to use their services. Be sure to work with a reputable tax preparer if you anticipate requesting a refund advance.

If you can’t wait for tax season to take out a loan, you’re in luck. A tax refund loan is just one of several options that you might consider. Next, let’s learn about some tax refund loan alternatives.

Personal Loans

You can use personal loans for a variety of reasons, and a personal loan usually has a repayment term of 12 – 60 months. A secured personal loan tends to have a much lower interest rate than payday loans and credit cards, making a secured personal loan a more affordable option. But you do need to secure the loan with collateral, which you could lose if you fail to repay the loan.

On the other hand, you could take out an unsecured personal loan, which doesn’t require collateral. Most unsecured personal loan lenders impose fairly strict income and credit score requirements, however. If you have too high of a debt-to-income ratio (DTI) or poor credit, you might have a hard time getting approved.

0% APR Credit Card

If you’re looking to consolidate debt, a 0% APR card can be a good option. Sometimes used for a balance transfer, this type of credit card comes with a promotional APR. For a short period of time, you can pay off your card balance without accruing interest, making it easier to pay off debt. To avoid fees, you’ll just need to pay off the outstanding balance before the 0% APR period expires.

Cash Advance

You can use a credit card you already have to get a cash advance, which is a short-term loan borrowed against your card’s credit limit. While this option can be helpful in an emergency, the APR is usually higher than your standard rate. It’s best to check with your credit card provider before taking out a cash advance to see what fees apply.

Personal Line Of Credit

Similar to a credit card, you can borrow funds from a credit line while making payments with a personal line of credit. This type of financing typically lasts a number of years, which are known as the draw period. You can borrow funds and repay them multiple times throughout the draw period. Like an unsecured personal loan, a personal line of credit often comes with strict eligibility requirements.

If you can’t wait for tax season to take out a loan, you’re in luck. A tax refund loan is just one of several options that you might consider. Let’s learn about these tax refund loan alternatives next.

Personal Loans

Personal loans can be used for a variety of reasons and usually have repayment terms of 12 – 60 months. Interest rates on secured personal loans are often substantially lower than the rates on payday loans and credit cards, typically making a secured personal loan a more affordable option. However, most lenders of unsecured personal loans impose fairly strict income and credit score requirements, so if you have too high of a debt-to-income ratio (DTI) or poor credit, you might have a hard time getting approved.

0% APR Credit Card

If you’re looking to consolidate debt, a 0% APR card can be a good option. Sometimes used for a balance transfer, this type of credit card comes with a promotional APR that lasts a short period of time, making it easier to pay off debt. You’ll just need to make sure to pay off the outstanding balance before the 0% APR period expires.

Cash Advance

You can use a credit card you already have to get a cash advance, which is a short-term loan borrowed against your card’s credit limit. While this option can work in an emergency situation, the APR is usually higher than your standard rate. To see what fees apply, it’s best to check with your credit card provider before taking out a cash advance.

Personal Line Of Credit

Similar to a credit card, a personal line of credit allows you to borrow funds from a credit line while making payments. This type of financing typically lasts a number of years and can be borrowed from and repaid multiple times. Like an unsecured personal loan, a personal line of credit typically comes with strict eligibility requirements.

Knowing that a tax refund is coming your way can be exciting. It may be tempting to use an advance to gain access to some of your money sooner than you otherwise would. However, tax refund loans aren’t ideal for everyone. For you to be eligible for a tax refund loan, your tax preparer must determine that the government owes you a refund. If you’re considering this option as you file your yearly return, take the time to fully understand the pros and cons.

If you decide the risks of a tax refund loan are too many and want to use a personal loan instead, you can get the prequalification process started today with Rocket Loans^SM.