Tax time has arrived, which means many people are anticipating a handsome refund check in coming weeks. Indeed, getting your hands on a stack of cash from the government can be exciting, especially if you want to accomplish big goals like making a down payment on a car, adding to your retirement savings or paying down debt.
Some people get so excited about receiving a refund that they don’t even want to wait for the standard 2-6 week period it takes for the government to send the money. Instead, they choose to take out tax refund anticipation loans. So how do these loans work and are they really a good idea?
The Basics of Refund Anticipation Loans
A refund anticipation loan (RAL) is a tax refund loan that gives you access to your refund before it is delivered by the IRS. These types of loans are usually issued by large tax preparation companies and are required to be paid back when the tax refund actually arrives.
Similar to a payday loan, RALs come with extremely high interest rates and fees. Depending on the company you work with, the interest could range from 40% to 700% APR.
In order to obtain a refund anticipation loan, you must contact a local lending institution to learn about different rates and options available. In some cases, personal and financial history could play a role in being approved for the loan.
Some interested parties inquire about whether they can take out a refund anticipation loan online. While taxes can be filed over the internet, there appears to be no service that allows an applicant to apply for an RAL online.
Is Taking Out an RAL a Good Idea?
The one advantage of taking out an IRS refund anticipation loan versus just waiting for your check to arrive is the speed of the process. Instead of waiting for weeks for your check to show up, you could receive your money in as little as one week with an RAL.
If you’re short on cash, this type of arrangement could be very helpful. But before you consider it, it’s good to know the potential disadvantages of RALs:
- High interest: As mentioned, the interest on a refund anticipation loan can be enormous depending on the company you work with. For some, the amount that must be paid back simply doesn’t justify receiving the refund a few weeks early.
- Upside-down loan: It’s possible that you could secure an RAL that after fees and interest, ends up larger than the amount of your tax refund. If this happens, you will be liable to repay the balance, not to mention you’ll be charged hefty fees and fines if you’re unable to repay the loan on time.
Just because there are some disadvantages of RALs doesn’t meant that they shouldn’t be considered. More than anything, it’s just important to know what the downside could be and also know alternatives.
Alternatives to RALs
If you think the RAL may not work for you, there are a couple of alternatives to consider:
- Refund anticipation checks: Many companies like Jackson-Hewitt and H&R Block, which recently stopped issuing refund anticipation loans, offer refund anticipation checks (RACs). The checks are meant to help those who do not have bank accounts and are waiting for paper checks (which take longer to arrive). Unlike RALs, they usually require no out-of-pocket costs.
- File online yourself: Another option to consider is filing your taxes online on your own, which could get you a refund in as little as 10 days. Many states allow residents to file for free if they earn less than a specific income. The only requirement is that you have a bank account so that your funds can be directly deposited.
It’s good to note the Federal Deposit Insurance Corporation (FDIC) regards RALs as “unsafe and unsound.” Of course, choosing whether to get this type of tax refund advance is totally up to you. Before making the selection, however, weigh all of your options and ensure that you’re actually able to pay the cost for this speedy refund choice.