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Are Tax Refund Loans Ever a Good Idea?

By Rebecca Lake
January 22, 2020

As tax season gets underway, you might be dreading the paperwork but looking forward to this: Getting a refund. 

More than 111 million refunds were issued to taxpayers in 2019, with the average refund totaling $2,860. If you got a refund last year, you might be expecting a refund repeat for 2020. In the meantime, if you don’t want to wait for your refund, a tax refund loan can help you get your hands on your cash faster. 

But, let’s step back for a moment. Are tax refund loans a good idea and what are they anyway? 

Read on to learn more. 

What Is a Tax Refund Loan?

In a nutshell, a tax refund loan is a short-term loan that lets you borrow against your tax refund. They can also be called refund anticipation loans, since these are loans you would receive in anticipation of getting a refund. 

“These loans are designed to give a taxpayer quicker access to funds that they’re expecting to receive at the end of tax season,” says Josh Zimmelman, owner of New York-based Westwood Tax & Consulting LLC

A handful of well-known tax preparation companies offer tax refund loans, including H&R Block and TurboTax, though some smaller companies also offer them. The amount you can borrow from your refund varies, depending on the company. H&R Block, for example, offers refund anticipation loans of up to $3,500 while Jackson Hewitt caps refund loans at $3,200

How a Tax Refund Loan Works

Each company that offers tax refund loans has its own guidelines but the process for getting one is generally the same. 

Carey Gay, enrolled agent and managing member at Treasure Tax, LLC in Kennesaw, Georgia explains the finer points.

“Your tax preparer partners with a bank to offer these loans. Upon completion of your tax return, you’re offered a tax advance loan, which will give you cash to walk away with that day,” Gay says. 

Both H&R Block and Jackson Hewitt issue prepaid debit cards to hold loan funds. TurboTax also uses prepaid debit cards to issue refund advances of up to $2,000

What’s Good About Tax Refund Loans?

There are several reasons why you might want to consider a tax refund loan. Speed is at the top of the list.

H&R Block, TurboTax and Jackson Hewitt all tout refund loans with fast funding that can take as little as a few minutes. At the most, you might wait 24 hours to get your refund anticipation loan approved and funded. 

Compare that to a short-term personal loan, such as the kind offered by online lenders. While it’s possible to get approved for a short-term loan relatively quickly, you might still wait a few business days for the money to hit your bank account

Cost is another potential plus associated with tax refund loans. With a traditional short-term loan or personal loan, you might pay fees, interest or both to borrow money. A credit card cash advance is another way to get cash quickly, but you may be stuck paying double-digits in interest. 

Tax refund loans, on the other hand, often charge no interest or fees. Not only that, but people with poor credit can typically get approved. 

“This loan is guaranteed by your income tax refund, as calculated on your return. So someone with poor credit and no collateral can be approved for a tax refund advance because the refund amount is the collateral,” says Gay.

Another credit upside is that applying for a refund anticipation loan typically won’t hurt your credit. That’s because lenders may choose to do a soft pull of your credit history, rather than a hard pull. You can, however, expect the lender to review your tax return and your income as part of the application process. 

Why You Should Think Twice About Tax Refund Loans

Keep this in mind: Even if you pay no interest and fees, tax refund loans are not exactly free. 

For starters, you’ll have to pay for your tax preparation with the company that’s offering the refund loan. On average, this can cost anywhere from $99 to $450. If you normally pay a tax preparation company, this might not raise an eyebrow. But if you file your taxes using free tax prep software, then paying a fee just to get a 0% refund loan might not be worth it. 

Not only that, but you may be subject to fees when taking out a refund anticipation loan. Jackson Hewitt, for example, offers two refund advance options at 0% but a third, the Go Big Refund Loan, carries a 2% fee. If you don’t read the fine print, you can end up paying fees.

If you need money quickly, there are other ways to borrow besides a tax refund loan. For example, you might consider:

  • Getting an online personal loan
  • Using a 0% APR credit card to make purchases or pay bills
  • Opening a personal line of credit 
  • Borrowing money from friends and family

Each one has pros and cons. For example, it may take longer to get approved for a personal loan or line of credit. And, borrowing from friends and family can lead to a rift if you’re not able to repay the money. 

So, do your homework. Once you have all the numbers in front of you, you can decide which borrowing path is best.

What Will You Do With Your Tax Refund?

If you’re expecting a tax refund this year, now is the time to start thinking about how you can best use it. For example, you could open a savings account and use your refund to kickstart your emergency fund. Or, you might decide to pay down your student loans. 

You can also treat yourself to a little something special. Whatever you decide to do, make sure you have a financial plan. This will help you make the most of your tax refund!

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