A tax refund advance is just what it sounds like – an advance on your tax refund. Sometimes it is called a Refund Anticipation Loan (RAL) or Refund Anticipation Checks (RAC).
With a tax refund advance, a lender loans you money (“advances”) that you will repay in exchange for a fee. The amount of the loan is based on what you believe your tax refund to be.
Tax refund advances provide people who are short on cash with money until they receive their refund. A tax refund advance is a short-term loan. However, you should think of tax refund advances as payday loans for tax returns. Not great.
Why You Should Avoid Tax Refund Advances
If someone wants a tax refund advance it is because he needs cash fast – faster than the IRS can get it to him.
The problem with tax advance refunds is that usually the fees are outrageously high and the interest charged on the loan is triple what it would normally be for a loan. And just like any other loan, the full amount must be repaid – even if the refund is lower than expected.
While the actual fees and interest rates vary widely from lender to lender, you can expect to pay too much (e.g.: 10% interest rate and $100 fee for a $1,000 refund, at best).
Ultimately the cost of getting a tax refund advance is too high. Not only that, but lenders prey on people with low incomes who are likely to really need the money and may not be aware as to why these loans are not in their best interest.
The people who need the money the most, end up paying steep rates for it (in fees and interest). One company, listed below, even has their service offered at IRS.com (notice the .com and the real IRS is not a company and the website is actually at .gov). It’s sleazy.
Examples of Companies That Offer Tax Refund Advances
There are a growing number of companies that offer tax refund advances. Examples of companies that offer this service include:
You can see from the list above that some companies exist exclusively for the purpose of issuing tax advances (like TaxAndvance.com), while other companies include it is a feature with other services (H&R Block).
Regardless of where you get the tax refund advance from, you are getting the same product – a high fee loan in exchange for your tax refund early.
Other Options to Meet Your Financial Needs
Instead of signing up for a tax refund anticipation advance, tax payers should consider taking steps that make it less likely they would need this service.
For example, e-filing is one way to ensure you get your tax refund as fast as possible. With e-filing, you can request a direct deposit of your refund into a checking or savings accounts, which typically takes between 10 and 21 days (for state and federal refunds, respectively). E-filing is a much faster way to file than when tax payers had to file their taxes using standard mail, which use to take weeks or months to get your return. E-filing helps eliminate the long waiting period that once was.
Another way to avoid needing a tax advance refund is to start a $1,000 emergency fund. Starting a small emergency fund (of about $1,000) will give you extra buffer and financial margin. This small emergency fund can help you avoid needing an advance during tax season.
If you need money in a pinch before your tax refund arrives, then consider using a personal loan or possibly even a credit card if you could afford the minimum payment until your refund is delivered and then pay off the entire bill. Carrying debt on a credit card gets extremely expensive, so you should always aim to pay it off on time and in full.
If you are having a tax professional prepare your taxes, you may be able to pay him by having his fees taken out of your refund. Not all preparers do this, but it is a common way to pay for tax preparation services. Check with your tax preparer to see if this is an option for you if you are having trouble coming up with the cash to pay for the service.
Finally, consider adjusting your withholdings with your employer. If you are getting a tax refund it means that you over-withheld (i.e. your employer withheld too much from your paycheck). If you increase your exemptions, your employer won’t withhold as much. This may get you closer to not receiving a refund at all. This would be ideal because then you aren’t paying more than you owe. You would have more money each paycheck, too. Of course, it is best to consult a tax professional before making any changes, but this may be a good option for you.
The bottom line is that you should find a way to avoid taking out a tax refund advance because you are likely to pay too much for such a short-term loan and the risk is avoidable through saving ahead of time, filing electronically, paying for tax preparation fees out of your refund, and adjusting your withholdings. Don’t let these lenders get the best of you – avoid the tax refund advance loan just like you would avoid a payday lender.