Can’t Wait for Your Tax Refund? Here’s Everything You Need to Know About Refund Advance Loans
Tax time is an important time for most families. You find out if you’re getting a tax refund. And this year, that assistance is more valuable than ever. For all of those who are wondering, the IRS will start sending out tax refunds in early March. If you anticipate that you will receive a refund this year, or you are claiming your Recovery Rebate Credit through your taxes, you may be looking forward to —and need— those funds.
If you absolutely need your tax refund before the IRS can send it to you, here is a quick guide to all that you need to know about a product you may have heard about: the Refund Advance loan. A Refund Advance loan is debt. It is a loan against the tax refund you are expecting to receive. It is usually between $200 and $4,000. Sometimes, you can get the loan within 24 hours.
You may find yourself in the position where getting money sooner rather than later can make a big difference. For this question, I am setting aside my tax professional hat and putting on my Accredited Financial Counselor® hat. As a financial counselor, I would prefer that you not pay unnecessary fees and charges or to place yourself at risk of having unexpected debt. But I also know that life happens. I suggest asking yourself three questions before rushing to any lender for fast cash.
1. Can I Wait? What Are My Other Options?
This year, because of the COVID-19 pandemic, the IRS has changed some of its filing dates. They started processing returns on February 12. Tax credits and refunds are expected to go out in early March. This means it may be a few weeks before you receive your funds.
If your bills are paid and you don’t need that money immediately, then can you wait a few extra weeks? If you are planning to make a big purchase, wouldn’t it be better to avoid paying fees and have more money?
2. How Much Does a Refund Anticipation Loan Cost?
The biggest reason to avoid a Refund Advance loan is the cost: it can be expensive. The fees can vary quite a bit, even those ones that offer a 0% loan. Some of these have already closed applications for loans, but for those that are still open, the costs can range from zero to hundreds of dollars in tax preparation fees. Usually, the costs of the loan are built-in to the tax preparer’s fee, or the tax preparer may sell additional services to you to pay for the loan. Here is an example: a taxpayer takes out a $500 tax refund loan, and pays a $59 tax preparation fee. This amounts to an APR of 142%.
It’s a good idea to ask yourself if you have other things to spend this money on that would be better for you. Is the charge really worth getting your money faster? Most Americans can file their taxes for free, and don’t need to pay the tax preparation fee that is bundled with the loan.
3. Can I Accept the Risk and Do I Understand the Terms?
This is the part that often gets ignored. I have shown my clients Refund Anticipation loans in the past. And I’ll tell you, it is rare for someone to actually read the terms and conditions. Typically, they glance and sign. Sometimes not even glance! What you need to be aware of is what happens if your refund is delayed. What happens if the IRS requests additional information before processing your return? Will that increase your costs with additional fees and charges? What happens if the IRS doesn’t give you a refund or gives you a smaller refund than you filed for? Will you get more charges? Will that negatively impact your credit if it happens? I ask these questions because these things all happen. Make sure these risks are worth taking before agreeing to a refund advance.
It’s also important to know more about the lender. In general, borrowing directly from banks is safer and cheaper, because banks are regulated by the government.
This tax year is different from previous years. This year, many households have received unemployment insurance, and this is taxable. (Stimulus checks are not.) If you believe you will owe taxes on any unemployment insurance you received, that can reduce your refund, which can impact the amount that you’ll have to pay back on any Refund Anticipation loan that you take.
If you don’t truly need the money right away, I encourage you to avoid a refund advance. You can put the money that would have gone to more fees toward paying off debt, toward your kids, or whatever is important to you.
Jerry Zeigler is a Navy veteran who serves service members with financial counseling and education. As an Accredited Financial Counselor®, he is a member of the Better Financial Counseling Network and is the owner of JZ Financial Management. As a tax professional and Enrolled Agent, he has a passion for helping taxpayers navigate taxes.