How Does a Loan Against Your Tax Refund Work?
A short-term loan is taken against your anticipated tax refund amount, also sometimes called a refund-advance loan or a refund-anticipation loan, is a kind of secured loan. This means that collateral is used to secure the loan. Refund anticipation loans might have fees and interest depending on the terms and conditions, or they may be billed as “no-fee” — although they sometimes have other charges associated with them.
Tax advance refund loans are short-term and have to be paid back when you get your tax refund loan payment. Banks often have tax preparation services that partner with them to offer these to their clients.
You’ll normally get your tax refund amount as a deposit into your bank account or loaded onto a prepaid debit card. When the IRS delivers your tax refund, they can deposit it into that bank account or a prepaid debit card via direct deposit. Lenders will then deduct the amount of the loan plus any interest or fees from the amount.
Tax-refund loans advertised as “no-fee” are often for smaller advance amounts than loans that involve interest, but there are various products in this category. The sum you can borrow depends on the lender, the tax preparer, and your financial health and credit situation.
When Can I Get a Tax Refund Loan?
To qualify for a tax refund loan, you must usually file your tax return first. Every year, the IRS publicizes the start of tax season when it starts accepting tax returns for the prior year’s taxes. You may be allowed to apply for your return earlier than that, but the IRS won’t process it until the season starts.
In 2021, the IRS will start accepting return applications on Feb. 12 for the 2020 tax year, although normally, tax season starts toward the end of January. If you’re pondering applying for a refund advance loan this year, inquire with the lender or tax preparer to see if the change in the opening of the season has an impact on their time frames.
Advantages and Disadvantages of Tax Refund Loans
There are some plusses and minuses to consider when deciding whether or not applying for a tax refund loan may work for you.
Pro: Quicker funding
If you request and a tax-refund loan is approved, the money may be available almost instantly — in as little as 24 hours from some banks if you decide to accept your refund via a prepaid debit card. That’s a lot quicker than the 21 days the IRS says it usually takes to receive a refund when filed electronically.
Con: Normally not free
Getting a tax refund loan may involve paying interest. Even if the refund-anticipation loan you’re approved for doesn’t require interest to be paid, there might be fees. For example, refund-advance services often come with fees associated with transferring your refund.
All tax preparers are different — some might offer tax-refund loans with no interest or fees, and others might charge interest and fees on the amount. It’s crucial to understand the fees and interest associated with a refund loan and read your refund-loan agreement to be sure you’re actually receiving the sort of loan you think you applied for.
Con: Earlier seasonal deadlines
Deadlines to get an advance from an online tax preparer are earlier this year — typically in February, before you may have planned to file your taxes.
Con: A notable risk
The risk with any sort of refund loan is that the loan’s size is calculated on how much you anticipate getting back in a refund. But many unexpected snafus could make your actual refund different than what you expected. It could be less than anticipated, in other words.
Example:
If you owe a federal or state debt, child support, back taxes, or student loans, the IRS can deduct the amount from your refund. When that happens, you could end up with a lot less than you calculated after you’ve repaid your refund loan and any fees connected to it.
Tax-Refund Loan Alternative
Here are some alternatives to consider if you haven’t decided yet whether a tax-refund loan is for you.
Small Personal Loans
You might be able to get a small personal loan if approved for $1,000 or less through some online lenders.
Credit Card With Introductory 0% APR Offer
If your application is accepted for a 0% intro offer, and if you make all your payments on time and pay the balance off before the promotional period ends, then you won’t you won’t be charged any interest.
Payday Alternative Loan
Numerous online payday lenders will surely give you a loan based on the same criteria as a payday loan; if you can satisfy them, you will actually receive the amount you anticipate. You could still possibly get a percentage of the amount even if the end result is unsure.
The Bottom Line
Although tax-refund advance loans can get the cash you need quickly, there are still many things to consider before you decide. Will applying for this type of secured personal loan will work for you? If you do decide to apply for a tax refund advance, here are some tips.
Continue With Caution
These loans could end up costing a lot because of potential interest and hidden fees.
Carefully read the Terms and Conditions
If something isn’t clear, ask questions and be sure you understand exactly how much the loan is actually going to cost, including any fees for the deposit account or prepaid card connected to the loan.
