- How a loan upon your tax refund works
- Pros and cons of tax-refund-loans
- Tax-refund loan alternatives
How financing upon your tax refund works
A loan against your tax refund, also referred to as a refund-advance loan or a refund-anticipation loan, is a type of secured loan. This means that collateral is used to be sure the loan (in this instance, your anticipated tax refund). Refund anticipation loans might have fees and interest, or they might be marketed as \”no-fee\” – even though they will often have other costs associated with them. Refund-anticipation checks, a different type of refund-advance product, is really a loan for the tax-preparation fee from your refund.
Tax-refund loans are short-term loans and must be repaid whenever you receive your tax refund. Banks typically partner with tax-preparation services to provide these financing options for their customers.
You'll usually receive your refund-advance loan like a deposit into a banking account, or on a prepaid debit card. Once the IRS issues your refund, it will be deposited into that bank account or to the prepaid debit card, and also the loan amount and then any interest or fees will typically be deducted in the account.
Tax-refund loans marketed as \”no-fee\” are usually for smaller advance amounts than loans that charge interest, but products vary. The amount you can borrow depends on factors such as the lender, the tax preparer, as well as your financial and credit health.
When can one obtain a tax refund loan?
In order to apply for a tax refund loan, you'll generally have to first file your federal tax return. Each year, the government announces the start of tax season if this begins accepting tax returns for the previous year's taxes. You might be able to file your return sooner than the official first day's tax season, however the IRS won't process it until the season begins.
In 2022, the IRS will start accepting returns on Feb. 12 for that 2022 tax year, although typically tax season begins at the end of January. If you're thinking of applying for a refund cash advance this season, check with the lender or tax preparer to ascertain if the later opening of year might affect their lending periods.
Pros and cons of tax-refund loans
There are a few pros and cons to think about when considering whether trying to get a tax-refund loan may be a good option for you personally.
Pro: Faster funding
If are applying and therefore are approved for any tax-refund loan, the funds may be available quickly – within 24 hours from certain banks if you opt to receive funds using a prepaid debit card. This is a lot faster compared to A 3 week period the IRS says it often takes to issue reimbursement when filed electronically. But don't forget, a refund-anticipation check, which is only a loan of the tax-preparation fee, won't get you your refund any faster.
Con: Usually not free
Getting a tax-refund loan may or may not involve paying interest. But even if the refund-anticipation loan you're approved for doesn't assess interest, there might be fees. For example, refund-advance products typically come with administrative fees associated with transferring your refund.
Every tax preparer is different – some offer tax-refund loans with no interest or fees while others may charge interest and fees on the loan. You need to comprehend the fees and interest for your refund loan, and read your refund-loan agreement to make sure you're actually obtaining the type of mortgage you thought you requested.
Con: Early tax season deadlines
Deadlines to obtain an advance from a web-based tax preparer are early – typically in February, prior to you may have planned to prepare and file your taxes.
Con: A substantial risk
The danger with any kind of refund loan would be that the quantity of the loan is based on just how much you anticipate getting back inside a refund. However, many factors might make your actual refund amount different than that which you expected.
For example, if you owe a federal or state debt, supporting your children, back taxes or student education loans, the IRS can reduce the amount of your refund. When that happens, you could find yourself that has a lot less money than you anticipated after you're done repaying your refund loan and any associated fees.
Tax-refund loan alternatives
There are a few alternatives to consider if you're not sure whether a tax-refund loan is right for you.
- Small personal loan – If approved, you might be capable of getting a small personal loan for $1,000 or less through some online lenders.
- Credit cards with introductory 0% APR offers – If you're approved to have an intro 0% offer, making all your payments promptly and make payment on balance off before the promotional period ends means you won't pay interest with this option.
- Payday alternative loan – Provided by federal credit unions, these small short-term loans can't charge more than 28% interest (when compared to equivalent of 400% APR or more for typical pay day loans).
Bottom line
While tax-refund advance loans is definitely an option to quickly get the cash you'll need, there are many items to keep in mind prior to deciding if applying for this type of secured personal loan is useful for you. If you do decide to apply for a tax-refund advance, here are a few tips.
- Proceed with caution. These loans could come with a expensive because of potential interest and hidden fees.
- Read the terms and conditions carefully. Ask questions if something isn't clear and ensure you understand just how much the loan will in fact cost, including any related fees for that account or prepaid card linked to the loan.
