What Is a Tax Refund Anticipation Loan and Are They Worth Taking Out?

It’s tax season again and that means that millions of people will be looking forward to a tax refund and many will be looking for ways to get their hands on their refund sooner rather than later. Tax refunds made by paper checks can take weeks arrive and, even though online filling can now greatly speed up that process, a lot of people still use tax refund anticipation loans (RAL) to gain access to their tax refund money quickly.

what is tax refund anticipation loan

How a Refund Anticipation Loan Works

Tax refund anticipation loans, which are often offered by tax preparers as a way to speed up the tax refund process, are loans that are made against the anticipated amount of a tax refund.

Once a tax preparer has completed a person’s tax return and they have calculated the amount of the refund that is due, the taxpayer can apply for a an anticipation loan in advance of the IRS paying the refund. When the tax refund is eventually received, the money is used to repay the loan and any interest charges that have accrued on the loan. It is also often used to pay the tax preparers fees as well.

For people who are in need of cash fast, a refund anticipation loan can give them access to the cash they need to pay urgent bills or repay other loans. However, the convenience of getting access to the funds from a tax refund in a matter of days, rather than weeks, does come at a price. RALs are usually approved very quickly and applications are not dependant on a person’s credit rating, so anyone who is due a tax refund can apply for one. In many ways, RALs are very similar to payday loans.

Many people have criticized RALs, however, because of the high cost. Administration fees on loans of this type usually start at around $30 and the interest rates can be as high 300% APR. Criticism has also been raised over the way that RAL are often advertised as being a means to fast-track tax refunds, rather than as the expensive loans that they really are.

Are refund anticipation loans worth taking out?

Whether or not an RAL would be suitable for an individual will depend on that person’s own financial circumstances. If a person does have an urgent need for cash, then an RAL could provide the answer, although it is a very expensive way to borrow money.

If a person has no immediate need for the cash, then the cost of the interest and charges on a tax refund loan would be an unnecessary expense that would reduce the total value of their refund, all for the sake of having access to the tax a few weeks earlier.

It should also be noted that the speed of processing tax refund can be greatly speeded up by filing tax returns online and online filing is now available for free in most states for people who are on low incomes.

Another drawback with RALs is that, should the tax refund be less than expected or it his withheld by the IRS, the loan, fees and interest will still need to be paid back in full by the borrower and extensions on these loans are extremely expensive.

Tax refund anticipation loans in summary

In summary, the cheapest option is to wait for your refund, but if you need cash fast and you can’t wait for your cash refund to be processed, an RAL will give you virtually instant access to the money that is due to you from the IRS. The high fees and interest rates that will be charged, however, will mean that will receive less of your refund than if you had waited for the normal refund process to be completed. Alternatively, you could file your return electronically to speed up the process, or you could search for alternative short-term loans, which may be cheaper, from online loan matching services and other short-term lending sources.