If there is one thing that you can always rely on, it is that when tax season arrives, so do all the advertisements for refund anticipation loans. If it’s not your tax preparer that is pushing an RAL at you, someone else certainly will.
Before you jump in with both feet and take a tax refund loan, just because it promises to get you an instant tax refund, read these important facts that you need to know about tax refund advances.
A tax refund loan is an advance against your tax refund. Although they are often marketed as “instant refunds”, it is important to remember that they are loans and they do attract fees and interest. While they do allow you to gain access to your tax refund money faster, they are also an expensive way to borrow money.
Tax refund loans are often offered by tax preparers, although the loan itself is usually provided by a third party lending company. When you apply for a tax anticipation loan, you will be approved based upon how much you expect to receive from the IRS. The approval process is usually very quick and the funds from the loan may be made available via a paper check, wired to your bank account, or given to you in the form of a pre-loaded debit card. Once your tax return has been processed by the IRS, your refund will be paid to the lender to clear the loan.
Tax refund loans are generally a very expensive way to borrow money. You are likely to be charged an arrangement fee of around $30 and the annualised interest rate is likely to be very high. It can work out to be a very expensive way to obtain money that is rightfully yours anyway. When you add up all the fees and interest, these loans can be just as costly as the notoriously expensive payday loans.
When you take out a loan of this type, you are agreeing to repay the loan, plus the charges and interest, regardless of whether or not you receive the full amount of tax refund that you expected. If your tax preparer makes a mistake, the IRS disallows some items, or the IRS withholds your tax refund, you are still liable to repay the loan, in full, the interest and the fees.
The first alternative to consider is do you really need to take out a tax refund anticipation loan at all? If you don’t need the cash to pay urgent bills, you would receive more of your refund if you simply waited for it to be processed by the IRS.
If you do need funds urgently and it is tax season, a tax refund loan is not the only avenue that you should explore. Shop around for a loan, just as you would at any other time of the year and find the right deal for you. At the very least you should make an inquiry with one of the many free online loan matching services and find out if you could obtain a short-term loan at much better rates than you would get from a tax loan from your tax preparer.
The important thing to remember is that a tax anticipation loan is a loan; it’s not a way of fast tracking your tax refund, so you should use all the same caution that you would use where you to take out any other type of finance agreement.