Should You Get a Cash Advance on Your Tax Refund?
Sure, you could get your tax refund money a few weeks early, but even a Refund Anticipation Loan (RAL) with zero interest still usually comes at a cost.
Tax refunds are a classic example of “hurry up and wait.” You do all that work to get your tax returns submitted in a timely manner only to sit around for weeks waiting for your tax refund to arrive.
It can be annoying, sure, but you’re probably better off just waiting it out. Lots of companies advertise cash advances that let you get your tax return money now, but the cost of these products is higher than you might expect.
How do these tax refund advances work?
When you file your state and federal taxes, you’ll receive one of three outcomes: You’ll either owe more money, owe no money at all, or you’ll be due for a return because you’ve paid too much.
For people who work regular jobs (as opposed to freelance or contract work or people who own their own businesses), taxes are withheld from your paycheck. Oftentimes, the amount you’ve paid is more than what you actually owe.
This means you get a tax refund. Great! But you won’t get that refund immediately. Most federal tax refunds are processed and sent out within 21 days of the return being submitted.
But what with the recent government shutdown, and the (thankfully remote) chances of another shutdown occurring in the near future, there’s a chance that your refund could take even longer to process.
That’s where Refund Anticipation Loans, or RALs, enter the picture. These are loans secured by your tax refund and basically function as a cash advance. You get the money now, and the lender gets your tax return later.
Even “free” refund cash advances often have a cost.
Many RALs are offered by tax preparers as a way to incentivize customers. In return for filing your taxes with them, you get your money now. Not a bad bargain, right?
Eh. While the terms for many RALs have improved over the years, they still come with additional costs. And those costs are often higher than they first appear.
You might see a RAL advertised as a “no interest” loan. And that advertisement might be telling the truth! A number of tax preparation companies do indeed offer RAL’s with an interest rate of zero percent.
But that doesn’t mean that the loan is free. For instance, you’ll probably have to pay an additional fee in order to get that loan. The fee could be higher if you can’t accept it as an online loan through direct deposit, requiring a paper check or a prepaid debit card.
A 2018 study from the National Consumer Law Center found that the average fee for a RAL was between $29 and $65 percent for federal returns. They also found that RALs for state returns carried an average fee of $10.
And besides, do you even need to work with a tax preparer at all? Check out the IRS website to see if you qualify for free file.
If you have a refund of $500 and you’re paying $65 to get that money two weeks in advance, the terms you’re paying aren’t all that different from high-cost payday loans. It works out to an annual percentage rate of 338 percent.
Even if your RAL doesn’t cover your entire refund—meaning that you still get money back in the end—you’re still paying extra for not a lot of benefit. Is getting that cash a few weeks early really worth it?
Consider all your financing options.
Here’s the thing: Sometimes you do need money right now. Even waiting a few weeks is too much to ask. Trust us, we get it. So what should you do if that’s the case?
If you’re considering a cash advance on your refund, make sure you do all your research before committing to a lender or tax preparer. Go beyond a quick Google search—or at the very least get beyond the first few pages of search results.
Check out the company’s customer reviews to see what other people think of them. Visit their BBB page and check out the kinds of complaints they’ve had lodged against them. Carefully read the terms of the loan agreement and compare costs to other products on an annual basis.
If you’re facing an emergency expense or a temporary cash shortfall, look for other places to get that money beyond a RAL.
Look at your budget to see where you can cut back. (If you don’t have a budget … create one.) Even if you end up having to borrow money to make ends meet temporarily, a month or so of strict belt-tightening will help you pay off that debt quickly.
Talk to your friends and family and ask if you can borrow money from them. Obviously, this option comes with a lot of social awkwardness and potential downsides. Make sure that you and the person lending you money are both crystal clear on the loan terms; you can even write up your own personal loan agreement!
Whatever you do, make sure that you steer clear of high-cost no credit check loans like payday and title loans. These kinds of short-term bad credit loans are different from your standard installment loan, with high APRs and lump-sum repayment terms that leave many borrowers struggling to pay them back on time.
The best way to protect against the need for any kind of short-term cash advance like a payday loan or a RAL is to build up your emergency fund. Having a cash buffer in place will let you ride out those surprise expenses and wait for your full refund to arrive. To read more about how you can build up an emergency fund, check out these related posts and articles from OppLoans:
- 8 Ways To Save Money Today, Tomorrow and Every Day After
- Your Guide to Escaping a Debt Trap
- From Budget to Baller: 6 Tips to Grow Your Money
- 8 Good Habits to Get Your Finances—and Your Life—on Track
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