Tax Refund Anticipation Loans Are More Dangerous Than You Think

Tax Refund Loans

“Can I get a loan against my tax refund?” Well, yes. But you probably should just wait it out.

The best thing about tax season is, well, nothing. No one wants to spend hours pouring over complicated financial documents, only to wait weeks for that sweet refund check to arrive. That’s why getting a tax refund anticipation loan (or RAL) can seem like such a great idea right now. These lenders promise to deliver all the money from your hard-earned tax return right now, with none of the pesky wait.

But a tax refund advance isn’t some magical time machine for your money. Unlike legitimate tax refund advance services offered by many tax preparation companies, tax refund anticipation loans can be problematic for a variety of reasons.

First and foremost: taking one out guarantees you’ll net much less on your refund than you would if you just waited it out. In fact, many refund advance loans are little more than predatory payday loans wearing a false mustache and a pair of coke-bottle glasses.

If you’re considering getting a loan against your tax refund, you should know all the facts before you jump in.


How do tax refund loans work?

You’ve just finished filing your taxes, and from the looks of it, you can expect a big windfall when that refund check arrives. While that’s great news for future you, present you is feeling the pressure to get that money ASAP. Maybe rent is due on Friday, or those post-holiday credit card bills are piling up. Whatever the reason, if you need some fast cash, there are many lenders out there who will help you out.

Essentially, these loans work like many other cash advance services. Lenders who offer tax refund advance loans take the amount you’re expecting to get from the government and give you a short-term loan based on that number. These kinds of loans are typically available between December and April of any given year, and when your refund comes in the mail, you’ll use that to pay off the loan.

But depending on the lender, you could be stuck paying payday-level interest rates on money that’s rightfully yours. Take the case of William and Sammia Dejolie, a New Mexico couple who took out a $1,250 refund anticipation loan in 2014 and ended up being charged an APR of nearly 400 percent on that loan. Yikes!

Additionally, many lenders offering RALs charge fees on top of interest, chipping away at your refund dollar by dollar. Sure, taking out a RAL might put money into your hands temporarily, but by the time your real refund comes in, you may owe more than you got back.

Are any tax refund loans safe?

You’re probably savvy enough to know why you should stay away from storefront lenders promising quick cash on your return. Getting caught up in predatory RAL from one of them could leave you struggling to repay what you owe. In that sense, these loans are no different from the kinds of dangerous bad credit loans and no credit check loans that these lenders are hocking all year round. They’re all about trapping you in a predatory cycle of debt.

But many legitimate tax preparation companies like H&R Block and Jackson Hewitt also offer refund advance loans to customers with no fees or interest. Is it a bad idea to take out a loan against your tax refund from one of these places?

Unfortunately, it’s still risky. First, it’s important to note that these services, though advertised as “fee free” and with “zero percent APR,” are not “free” in any way. In order to qualify for a RAL through a tax prep company, you need to pay to have your taxes prepared there. Depending on how complicated your returns are, this could cost upwards of several hundred dollars, all of which will be taken directly out of your return. Do the math, and you’ll realize that simply filing taxes on your own and waiting for your refund could save you hundreds of dollars.

Additionally, while you might think you know exactly how much you’ll be getting back from Uncle Sam, your anticipated refund might not match up with reality. Let’s say you take out a $3,000 refund advance on the expectation that you’ll get $3,000 back: What happens if your actual refund looks more like $2,000?

As the State of Wisconsin Department of Revenue puts it: “If the refund is smaller than anticipated due to deductions for items like unpaid child support or traffic tickets, the full amount of the loan must still be repaid.” That means you’re on the hook for the difference.

Alternatives to tax refund loans

Instead of relying on costly a refund anticipation loan to get a quick buck right now, there are a few things you can do to both quickly get your tax refund and give yourself a financial leg up in the new year.

File ASAP. According to the IRS, nearly one-fifth of all Americans file their taxes at the last minute. And if you wait until April 15 to file your taxes, you probably won’t see your return until the end of April or early May. If you need that money before then, file your taxes early! Employers must legally provide employees with their tax documents by January 31, so once you get those, you can go ahead and file. The IRS will likely begin processing tax returns and sending out refunds in early February.

Set up an account with direct deposit. The IRS estimates that Americans who e-file and use direct deposit typically get their refunds within 10 to 21 days of filing, and you can track when your refund is coming using their “Where’s My Refund?” tool.

And if you don’t have a bank account? Well, then getting the most out of your tax refund is going to be tricky, as you’ll likely be relying on check-cashing businesses, which take out a fee for their services. If you don’t already have a checking account, now is the time to start one so you can choose to get your tax return deposited directly into your bank account.

Stop relying on your refund. Contrary to popular belief, you shouldn’t actually want a tax refund. Yeah, it’s nice to get a big chunk of change all at once, but your tax refund isn’t the same as a work bonus or some kind of annual gift from the government. All that money is money you made throughout the year, money you’re essentially lending the government with zero interest. If you’re strapped for cash most months, but get a huge refund every spring, you should take a second look at your W-4. Adjust your tax withholdings to avoid having so much taken out of your paycheck.

Instead of getting $3,500 all at once, you could get an extra $291 added to your monthly budget, an amount that could mean the difference between living paycheck to paycheck and having extra cash on hand to start saving, make car payments, or even have a little fun.

Find a better lender. If you need money now and can’t wait for your refund, you deserve better than a costly refund anticipation loan. If you have good credit, apply for a cash back credit card! Many cards offer six months to a year of no interest, so if you need the amount you’re expecting back from your refund fast, use one of these cards and then pay it off once you get your refund back. Additionally, a good cash back card will give you money back for all purchases made with it, and some even offer hefty sign-up bonuses. So you could actually be making money by spending your tax refund.

If your credit isn’t so hot, don’t worry, you still have options. Consider taking out a personal installment loan from an online lender like OppLoans. For more information, just visit our Why OppLoans page.

To learn more about how to get the most out of your taxes, check out these related pages and articles from OppLoans:

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