Explaining Tax Refund Loans

The anticipation of your tax refund being approved is palpable. After all, for many people, this is the biggest unexpected bonus of the year. When filing taxes, you have two options for receiving your refund: either electronically (in 21 days) or manually (in around six weeks) in the mail.

Nevertheless, it makes sense that you would desire your funds sooner given that it is yours. Your tax servicer may share your view that you should take out a loan against your tax refund because the funds are legally yours. However, there are drawbacks to these loans that you should be aware of before reflexively saying “yes.”

Tax Refund Loans: What Are They?

A tax refund loan functions similarly to a payday loan in that both are short-term unsecured loans that are due in full when the borrower’s next salary is obtained. A tax refund loan, sometimes known as a payday loan, is a type of short-term loan that is secured against an expected future payment, such as a tax refund.

Although tax refund loans normally cost less than payday advances, this does not necessarily make them a better financial option. The specifics of how they function, however, will be the same regardless of which tax servicer you use because they are all offered simultaneously with your tax return.

You can get a loan against your tax return or an advance on your refund, which are all names for the same thing.

Tax Refund Loans: How Do They Work?

A tax refund loan requires you to essentially sign over your tax refund to your tax servicer. The procedure is as follows:

1. A tax servicer would normally open a temporary bank account on your behalf and instruct the Internal Revenue Service to deposit your return there.

2. The loan will be issued to you by your tax servicer in the form of a check, direct deposit, or prepaid debit card.
3. Your reimbursement will be transferred into your designated holding account.

4. After deducting the cost of tax preparation and any lending costs (usually $30 to $50), your tax servicer will hand over any remaining funds.

5. Once the temporary funds are gone, the account will be closed.

Where Can I Get a Tax Refund Loan?

Companies that help you file your taxes may also offer loans against your tax refund. Refund advances, refund anticipation checks, and refund anticipation loans are all names for the same thing. Still, the gist remains the same: rather than waiting three weeks or more for the IRS to process your return, you obtain it quickly.

Loans against future tax refunds can be obtained by using the services of a tax preparation business that offers such loans. In that case, you’ll need the IRS to owe you funds before you can apply for a tax refund loan. According to the IRS, around one-third of taxpayers who filed their 2021 returns in 2022 did not obtain a refund.

How to Apply for a Tax Refund Loan

The process of getting a loan against a tax refund is a little different than getting a loan against any other kind of fund. You are not allowed to choose which lender obtains your tax refund. Instead, it is an optional extra that many tax servicers provide. That is to say, you get to pick the tax servicer and the terms of any tax refund loan they may offer you.

The tax servicer must verify that you are due a refund from the Internal Revenue Service before they would approve a loan for the sum of the refund. You are not qualified for a tax refund loan if you have a tax liability because you did not pay enough taxes throughout the year.

To guarantee that you can obtain a tax refund loan if you are anticipating a tax refund and are interested in doing so, it is best to seek out a tax servicer who provides this service.

A Tax Refund Loan: Is It a Good Idea?

A tax refund loan could be the best choice if you fall into any of the following categories:

• In case of urgent financial necessity. A tax refund loan may be a good option if you need funds quickly and have nowhere else to turn.

• If there is no financial penalty for your participation. If you can acquire a loan with no up-front costs and no interest, you may want to take out the funds right away.

• If waiting for the funds would incur further expenses. To save funds, consider taking out a loan to pay off your debts instead of using your tax refund to cover the interest charges.

Sometimes it’s better to hold out until you get your actual tax return:

• If you were to otherwise file your own taxes.  To qualify for a loan based on your tax return, you will need to have your taxes prepared by a tax professional, which can be expensive. 

If you’re not short on cash and hiring a servicer is the only reason you have for doing your taxes, you might as well do them yourself and put off getting your refund until later.

• If you don’t need the funds immediately. It might be simpler to wait till you get back if you don’t need the funds right away.

• If you owe back taxes or child support to the federal government, you may be subject to a lien. Wait before taking out a loan based on a return that may not materialize in its entirety if you anticipate there may be a cause the IRS may withhold a portion of your refund.

• In the event that your expense for capital exceeds your anticipated return. You should look at personal loans as an alternative to tax refund loans if you need a larger loan sum.

Tax Refund Loans Alternatives

Tax refund loans normally have brief repayment periods. If you are unable to obtain a tax refund loan, but still require emergency cash, you should know that you have other available possibilities in this regard.

• Payday Advance Loan (PAL). Credit unions provide these loans, which are similar to payday advances but have more reasonable interest rates and repayment terms. They allow you to establish or improve your credit history at significantly reduced interest rates.

• 0% APR credit card. Credit cards with introductory 0% interest rate periods may be available to those with excellent credit. If you use the card to make a purchase and then pay it off before the introductory 0% APR period ends, you will have effectively obtained a cost-free loan.

• Personal loan. Loan terms for individuals normally range from two to seven years. Some banks and credit unions may be willing to work with you on a shorter loan term if you shop around. Moreover, if you need more time to repay the loan, you may always apply for a longer repayment period and then make early payments if you have the funds available.

A tax refund loan might be a quick and easy way to get the cash you need in certain instances. However, before committing to one, it’s important to weigh the costs (including any interest or fees) against the benefits.

Conclusion

While a tax-refund advance loan may seem like a quick and easy way to obtain the funds you need, there are several factors to consider before deciding whether or not to apply for this form of secured personal loan. Here are a few things to keep in mind if you’re thinking about requesting an advance on your tax refund.

• Think carefully before you move forward. Interest and other costs, both obvious and not, might make these loans quite expensive.

• Please read the disclaimer and terms and conditions sections carefully. Don’t be afraid to clarify any points of confusion and make sure you have a firm grasp on the total cost of the loan, including any account or prepaid card fees.