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If you’ve filed your tax return early, expecting to get money back, but can’t wait until February to get your hands on it, you could get fast cash through a tax refund loan instead.
A tax refund loan is secured by your estimated tax refund that year. These loans are offered by tax preparation companies, such as H&R Block or Liberty Tax, in partnership with a financial institution.
However, instant tax refund loans can come with pros and cons, including some pretty hefty fees. Here’s what you need to know to decide whether it’s the right choice for you.
What is a tax refund loan?
A tax refund loan, also called a tax refund advance, is a short-term loan that is offered either by the company that prepares your taxes or a loan agent. The loan is an advance on part of your tax refund.
Some tax preparers do not charge a fee in exchange for the loan, though you’ll still be paying for tax preparation services. In many cases, though, you may agree to pay certain costs for the tax refund loan, which may include a tax preparation fee or a service charge every time you use your funds.
Here’s a breakdown of the fees you might be expected to pay:
- Application fee: If you pursue a tax refund loan through a lender, you could be charged an application fee of up to $100.
- Cost of preparing your taxes with a professional: On average, the cost of tax form preparation with itemized deductions is $294, while completing your paperwork without deductions could set you back by $188, according to a National Society of Accountants survey.
- ATM fees for withdrawals, monthly maintenance and balance inquiries: If you choose to receive your loan in the form of a prepaid debit card, you might pay service charges for a range of simple transactions that can add up very quickly. These fees could be as high as $3 for an ATM withdrawal or $4.95 to put more cash on your card.
- A check processing fee: You could be charged up to $25 in processing fees to receive your loan in the form of a check.
- A fee for setting up a temporary refund account: This fee could set you back by around $30.
- Interest rate fees: If you choose to go with a lender, you may pay interest, with rates starting at 36%*.
Your tax refund advance loan may be either deposited into a bank account or loaded onto a prepaid debit card. When the actual refund arrives from the government, it will be sent directly to your financial institution, which will deduct the amount of the loan and all associated fees from it. You then get to keep the rest of your refund.
There are both pros and cons to using a tax refund loan to get cash in a hurry:
- You can get your funds within days. In some cases, you may be able to get your loan within 24 to 48 hours. "This last tax season, we saw many people taking advantage of that benefit during the government shutdown," said Michael Micheletti, the San Mateo, Calif.-based director of corporate communications at Freedom Debt Relief. "Many more people were living paycheck to paycheck (and needed) the funds right away."
- It could end up costing you nothing. If you need to hire someone to prepare your taxes anyway, and they are offering you an advance loan for free, you would pay only the tax preparation fee you would have paid anyway.
- You could use your loan to pay off high-interest debt right away. A lump sum of cash could help you avoid paying hefty interest fees on outstanding bills.
- Your refund could be less than anticipated. If your accountant has made an error in calculating your taxes or the IRS withholds your funds for some reason, you would still be on the hook for paying off the full amount of the loan.
- You have to hire the company offering you the loan to prepare your taxes. This means you have to pay them whatever it charges to do so.
- There could be extra hidden fees. This could include the fees for using the bank card on which the loan has been deposited, as well any interest the lender may charge you on the advance. The tax refund loan’s predecessor, the tax refund anticipation loan, was banned by the government due to very high fees.
Can I get a loan on my income tax return?
If you are expecting to get some money back on your income tax return this year but urgently need the funds now, you can apply for a tax refund advance loan. There are some important drawbacks to consider, including hidden fees and costs that will eat away at the value of your anticipated tax refund.
Keep in mind, too, that not everyone is eligible for this type of loan, as it is contingent on the amount you expect to get back, which should be enough to cover all the associated fees you can expect to pay.
How does a tax refund loan work?
Your tax refund loan application, along with your income, pay stubs and credit score, will be reviewed by the financial institution. If you qualify, the loan will be either deposited into a bank account or loaded onto a prepaid debit card. You may use the funds for whatever you wish. The amount you get depends on a number of factors, including the tax preparer you choose and the amount of the refund you are expecting that year.
When your tax refund from the government finally arrives, it will go directly to the financial institution, which will deduct its fees and the amount of the loan. Whatever remains of your tax refund will then go to you.
Where to get a tax refund loan
There are numerous tax preparation companies that offer advance loans in partnership with a financial institution. Here are some places you might consider if you want to get a tax refund loan:
Jackson Hewitt offers a no-fee, 0% interest tax refund loan of up to $3,500, which is issued by Metabank.
Another advance option offered by Jackson Hewitt is the Go Big Fund Advance. You can apply for a loan between $1,000 to $7,000, depending on the amount you expect to get back. However, you can expect to pay interest rates of 35.9%* on your loan.
Issued by Axos Bank, your refund loan of up to $3,000 with H&R Block will be loaded onto a prepaid MasterCard. The card allows a one-time transfer by check or ACH for no additional fee. There are no finance charges or loan fees, and the loan offers a 0% APR*. You will have to provide proof that you are expecting a sufficient tax refund in order to apply for the loan.
To qualify for a tax refund loan with Intuit’s TurboTax, you must be approved for the Turbo Prepaid Visa card. Additionally, your refund must not be filed in Vermont, North Carolina or Illinois, and it must be at least $1,000 or more.
TurboTax refund loans are funded by First Century Bank and range from $250 to $1,000. There are no fees or interest associated with the loan.
Liberty Tax offers easy advance loans in partnership with Republic Bank & Trust Company. Your funds will usually be available within 24 hours of the acceptance of your tax return, but may take longer if you choose for your funds to be directly deposited into your bank account.
Should you get a tax refund loan?
If you are in dire need of funds to cover an emergency expense, such as a medical issue, and you absolutely cannot wait or it may end up costing you more if you do wait, then a tax refund loan may be an option worth considering.
In general, however, a tax refund loan is not worth the substantial fees you have to pay to get what will only be a portion of it in advance, said Paul T. Joseph, an attorney, CPA and founder of Joseph & Joseph Tax & Payroll in Williamston, Mich. "The costs associated with a refund loan are similar to those of payday loans: Both have interest rates that range from approximately 18% to over 100%," he said. "Those costs are typically much higher than home equity loans or signature loans available through a credit union, which are cheaper alternatives for obtaining a lump sum of cash."
If you do decide to get a refund loan, you must repay it upon receipt of your refund. You may receive a prepaid credit card in the amount of the loan in some cases, or the loan proceeds may be wired into your bank account directly. "Of course, there are fees associated with both these scenarios," Joseph said. "If you decide that you need a refund loan you should inquire as to what the total cost and fees will be to you."
Tax refund loan alternative options
If you find the associated fees and costs of a tax refund loan are too prohibitive for you, consider these alternatives to a tax refund loan.
Depending on your credit score and the amount you need, a personal loan can be an option. Some lenders offer loans starting at $1,000, without any restrictions for how they can be used. A personal loan is unsecured, meaning you don’t have to assume the risk of losing your home if you have difficulty paying it back on time. Your interest rate will largely depend on your creditworthiness.
A credit card can be a viable option, as long as you shop around for the best offers. If you have a high credit score, you may be eligible for low interest rates or even 0% APR introductory offers. If you can pay off your credit card before the promotional period ends, you may end up paying no interest on your balance. However, you run the risk of paying high interest and possibly deferred interest if you don’t manage to pay off your balance in full before the introductory period is up.
Payday loan alternatives
Another alternative to the tax refund loan is the payday alternative loan offered by some credit unions. Interest rates for these loans typically range between 18% to 21%*, though they can be higher. However, the funds issued through a payday loan generally do not exceed $1,000, and you must be a member of a federal credit union for at least one month in order to qualify.
How can I speed up my tax refund?
The best way to speed up the process of getting your tax refund is to file it electronically, and as soon as possible. Make sure you indicate that you would like your funds to be deposited directly into your savings or checking account, so you don’t have to spend additional time waiting for a check to arrive in the mail.
The bottom line
If you can’t wait to get your tax return back before February, there are a number of lenders who may be willing to give you an advance loan. However, the associated fees and service charges you might have to pay just to access those funds a little earlier can add up quickly. Depending on your financial situation, your credit score and how soon you need to pay off high-interest debt, a tax refund loan might not be your best bet. Make sure you consider alternative options like a personal loan or a low-interest credit card that could cost you less in the long run.
*Rate accurate as of the date of publishing.