Experts Say Tax Refund Advances Are Ill-Advised — What To Consider Instead
The turning over of a calendar year brings the hopeful promise of a healthy tax return come the spring. However, constant economic anxiety and heavy holiday spending have Americans looking to fix their battered balance sheets sooner rather than later.
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There are trusted ways to ensure you get your refund early, like e-filing, signing up for direct deposit and filing early (and without errors). Although the pandemic upset normal payout delivery operations, the IRS is generally quick in issuing tax refunds — usually between 10 days and three weeks from filing.
For some, taking the regular route to file and wait for a refund is too long a process. Getting a tax refund advance or a refund anticipation loan through a tax preparation service might seem like a quick and easy way to get funds, but as experts warn, these types of loans come with considerable costs and risks.
What Is a Tax Refund Advance / Refund Anticipation Loan (RAL)?
Regardless of what a third party calls it, a tax return advance is a type of loan administered by a tax preparation company that gives a taxpayer access to a portion of their estimated refund weeks or months ahead of when they would normally be filing their taxes with the IRS. The forthcoming tax return acts as collateral for the anticipation loan, which can be anywhere in the region of $250 to $4,000, according to Business Insider.
These advances differ in repayment conditions and fees, depending on the terms of the loan specified by the lender. If accepted, funds can be released to the taxpayer within a few days or sooner and will be paid back to the loaning company when a refund is received. Lenders offer refund loan advances as early as mid-December through February.
Downsides to Refund Advance Loans
Not surprisingly, interest rates on said loans — which, at around 35%, can be significantly larger than personal loans and even credit card annual percentage rates (APRs) — and finance charges are major drawbacks to tax refund loans, and are often hidden or not clearly specified. Further, the online or in-person tax professional approving your loan will need to be paid for preparing your filing.
“Many companies will advertise 0% APR loans, but in reality, they’re charging fees to offset this, including the tax preparation fee they’re charging for filing the return in the first place,” said R.J. Weiss, certified financial planner and founder of The Ways to Wealth website.
“This isn’t a standardized product,” Weiss added. “Therefore, fees, requirements and APRs vary drastically from one company to the next.”
A bigger risk of receiving a tax refund advance is the chance that once you file your taxes, your refund is less than you expected — and not enough to cover the refund loan. Unexpectedly not receiving a refund or having one delayed can contribute to (or kick off) a difficult debt cycle.
Alternatives to Tax Refund Loans
As quoted by Forbes, Michigan attorney and accountant Paul T. Joseph of Joseph & Joseph Tax & Payroll confirmed what is commonly held to be the best way to get a refund quickly: to e-file early and sign up for direct deposit.
“Once you have all of your documents, it is best to file as quickly as possible, and do so through the e-file program at the IRS,” stated Joseph. By doing so, you may be able to get a refund deposited to you within 10 days.
According to Forbes, planning throughout the year by re-adjusting withholding from wages might rectify the need to take out an advance refund loan before tax season rolls around. Getting less withholding taken from your paycheck each pay period will mean less of a refund in April, but more available funds during the year.
In the event of an emergency requiring cash, you are better off using a credit card or a personal loan (or a loan from a friend or family) than resorting to a tax refund advance. If you choose to get a refund anticipation loan or check, make sure you do your research and find a preparer that can offer you the fewest fees and lowest interest rate possible.
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