Your Tax Refund Is Likely to be Late – Should You Get a Refund Advance?
The IRS started processing income tax returns on February 12. The people who file earliest tend to be those who are owed refunds, especially from the earned income tax credit and the additional child tax credit. This year, that group includes people who were eligible for stimulus payments but didn’t receive their money.
The agency has said that it will begin sending out funds to tax filers in early March, which is a long time for people to wait in an economic crisis. Delays in mail, weather-related closings and high demand may drag the wait out longer than normal.
Rather than wait, many people turn to refund anticipation loans or other cash advance programs offered by income tax preparation firms. These are usually structured as loans that will be repaid out of the refund. Unfortunately, the programs often come with very high interest rates and fees.
The high rates and fees are especially frustrating because the length of the loan is short (rarely more than two months outstanding) and backed by near-certain collateral — the refund itself. The current Treasury bill rate is 0.07%. These loans have similar risk because they are being backed by another government obligation, the refund.
By all means, avoid refund advance loans if you can. If you can’t avoid them, Marketwatch recently reviewed the costs of different income tax refund advance programs and found the following:
- Refund anticipation check programs generally carry no interest but do have fees associated with them. A $35 fee on a $100 refund is a really high rate of interest given that the money is only being borrowed, but if you are due a large refund, then the charge works out to be a lower percentage. These are structured as temporary bank accounts from which taxpayers are issued their refund amount, less fees.
- Refund anticipation loans are actual loans that must be repaid when the refund is received. They carry interest based on how long the loan is outstanding, and the rates often exceed an annual rate of 36%.
- Refund debit cards are credited with the amount of the refund, then debited when the refund is received. These often carry lower fees because the issuers are receiving merchant fees whenever they are used.
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