After wrangling your W-2 forms, slogging through a good forty-five minutes of questions, and planning a shopping list for your soon to arrive refund, you’ve finally sent your tax return on a one way trip to the IRS all thanks to an online preparer. “You’re pre approved!”, a screen cheerfully reads, “Get your refund in as soon as 24 hours!” While this offer sounds tempting, what you see, may not be what you get.
If you file your taxes through a major preparation service, you may be offered an advance on your expected refund. Refund advance loans, sometimes called a Tax Advance loan or a Tax Refund Loan are extremely short term loans which are repaid by diverting funds directly from your tax refund. To the company providing your filing service. With the IRS generally depositing a refund into your checking within 15 days. These loans offer high fees for little advantage.
Quick Note about Refund Anticipation Checks
Similar to a Tax Refund loan, Refund Anticipation Checks are another method some tax preparers use to squeeze value out of your refund. Marketed as a way to “pay later”, A Refund Anticipation Check is a temporary checking account created for you by your tax preparer. The preparation service then directs the IRS to deposit your filing into this account. After your funds arrive, your filling service will help themselves to their share of your reimbursement.
While you won’t pay any filing fees up front, once your refund arrives, it gets divided up by filing fees, administration fees, whatever a “technology fee” is and many other charges you may not know you were expected to pay. While these checking accounts may be helpful if you can’t afford to pay your filing fee up front. This route only makes sense if you do not already have a bank account. Later in this article, we’ll look at a few alternatives for those expecting a refund without a bank account.
Tax refund loans or advances are short-term advances on a future tax return. If you need cash now for an emergency expense or to pay bills, some tax preparation services offer tax refund advances while you’re still waiting for your income tax return and expected refund.
The amount of the tax refund advance plus any fees are deducted from your tax return after it’s issues. Loan amounts usually range from $2,000 to $3,500 and you can get the money in as little as 1 day. To be eligible for a tax refund loan (also referred to as tax refund advance, tax advance loan or tax refund anticipation loan), you’ll need your taxes prepared by the company offering you the loan and that can mean a tax preparation fee.
Tax refund advances are appealing to early tax return filers and taxpayers who can claim the Earned Income Tax Credit or Additional Child Tax Credit. If you are living paycheck to paycheck, the early money that comes from your tax refund can be a huge boost and could save you from having to use payday loans, short term loans, or a payday advance app.
An alternative to a tax refund advance is getting a Possible loan, an installment loan that takes minutes to apply for and if approved, can get you money within an hour. Borrowers repay every couple of weeks and can build credit history since payments are reported to the primary credit bureaus.
Before 2012, tax refund anticipation loans were common and very expensive, similar to payday loans. After 2012, regulators took action against tax preparers offering refund anticipation loans and took advantage of a low-income taxpayer who was living paycheck to paycheck. Today, major tax preparation services have moved away from tax refund anticipation loans and offer tax refund advances to taxpayers.
Tax refund advances are usually available at no additional change from most tax preparers. You’ll get an advance on your future tax return and there’s no interest or fees on the money you borrow - an interest-free loan!
However, you’ll still pay the fees for getting your taxes prepared. In fact, tax preparation companies use a tax refund loan or advance as a marketing tool to get you in the door and do tax preparation with them. In addition, tax return services earn additional revenue through other services and upsells as well as charging an additional fee for those who can’t pay for the tax preparation up front.
Here’s the basic process:
Tax refund loans tend to be less up-front about their fees and risks compared to other short-term loans. These loans are often sold as a way to access IRS refund as soon as possible. To be fair, if all you are worried about is having cash on hand as soon as possible, you are generally able to receive your funds within 24 hours. Like most quick solutions, this speed comes at a very high cost.
High interest, low value
Tax Refund loans are generally sold as a fraction of your full IRS refund. Filing services will often only offer $250 on small refunds, up to a maximum of around $3000 for larger refunds. While these loans often have 0% interest, the true cost is hidden in filing fees. Your loan is automatically repaid using the money from your refund, however your filing fees are also pulled from this new stack of cash. This means on top of paying your loan back you’re adding the cost of the filing service.
Let’s take a look at an example. You’ve filed and are set to receive a whopping refund of $600. Your filing service offers you a “no interest loan” along with their filing fee of $90. Now this fee itself is only 15% of your refund. This may seem like a great deal, however this isn’t the true cost of your loan. By e-filing your taxes, you will receive your refund in about 2 weeks on average from the IRS. This means you’re borrowing money at 15% interest for 2 weeks. Let’s compare this to a longer term loan. If this loan was spread out over the course of one year, your loan would have an APR of about 390%.
Taking a step back, we can see these offers are really just short-term loans hiding in plain sight. It’s true that most short-term lenders charge higher rates in order to make their offers sustainable. However, companies that offer short term loans follow a much stricter set of legal guidelines and borrowers have access to many more legal protections which help to keep information transparent. The tax preparers which offer these loans are less regulated and less clear on the true conditions of these loans. When given an opportunity to access your money now with “no interest”, it’s easy to sign-up for a bad deal.
Controversial and unsupported
Unlike other forms of short-term lending. Tax Refund Loans offer high-profits with low-risk to the lender. These profits often come at the expense of those who are working and living paycheck to paycheck. A valuable refund comes with a stable income and the need for instant funds usually comes from financial instability.
The IRS previously worked alongside companies offering Tax Refund Loans by sharing information on borrow’s owed debts, student loans, and even child support with the intention of giving lenders more data. In 2011 this practice was officially ended by the IRS in order to protect the privacy of taxpayers. Later in 2013, most major US banks dropped the practice after widespread condemnation by consumer protection groups of the practice.
While high interest rates are a risk, sometimes you just need funds as soon as possible. Let’s take a look at some of the pros and cons of Tax Refund Loans.
Easy and fast access
Since most of these products are offered by a tax filing service, signing up for a refund advance is pretty simple. Most services will offer a loan after calculating your projected refund amount. Deposits usually only take about 24-hours compared to 2-3 weeks using the IRS e-file system. If you don’t have access to a traditional bank account, a Tax Refund Check could be a great alternative to waiting for the IRS to send you a paper check. Refunds made through a physical check can sometimes take over a month to arrive.
There’s still risk
While rare, if your refund differs from your expected refund, you’ll be on the hook to repay the difference. If you have any state or federal debt, owe child support, or have unpaid back taxes, the IRS can use your tax return to balance the checkbooks. If your refund is significantly less than the project amount, this high-interest short-term loan still needs to be repaid.
In order to apply for these loans, you’ll need to prepare your tax return through the same company. It’s difficult to compare offers from other providers as your loan offer is affected by your preparer’s projected tax return. Many of these Tax preparation services only offer loans at the very beginning of the tax season, giving you a smaller window of opportunity to apply.
Most major tax preparation services offer tax refund advance services. Below, we review three of the top services.
Most of the large tax preparation companies offer these loans. If filing through their services you may be offered an advance refund. Make sure to read the terms and conditions closely as you’ll probably be about and hour into filing taxes and may miss the information provided. The IRS is not required to repay you equal to your tax preparer’s estimate. If you decide to move forward with a loan, plan to receive less than expected from the IRS. Try accepting an advance for less than your projected refund, this way you can limit risk if your refund ends up being smaller than expected.
Loan amount: $250, $500, $750, $1250 or $3500.
Applications open: January 4th.
Filing fee: Free (when filing online) and starting at $59 with professional help
H&R Block offers a tax refund advance between $250 and $3,500 with no interest and no fees. You can receive money the same day you file your tax return if you are approved.
Because H&R Block’s tax refund advance is offered through its partner lender Axos Bank, the qualification criteria is not clear. Borrowers must meet certain eligibility criteria such as having a sufficient tax return from the IRS and provide appropriate identification. Axos Bank will evaluate the application based on standard underwriting criteria and make the decision to approve or deny the application.
With many brick and mortar stores and an online app, H&R block tends to be the most visible of the tax preparers. Your loan can be wired directly into your bank account or loaded onto an H&R block prepaid debit card. You can also have your filing costs pulled directly from your refund.
Proceeds from the loan will be placed on a H&R Block Emerald Prepaid Mastercard. The card allows a one-time transfer of funds by check or ACH from the card account for no fee. When your tax return comes, the amount will be deducted for any tax preparation fees and the tax refund advance and the remainder will be disbursed via direct deposit to a checking account, through check, or on your prepaid card, depending on what you select.
Your credit score will not be affected by applying for a tax refund advance but the lender Axos Bank may review your credit report.
Loan amount: $200, $500, $750, $1,000, $1,250 or $3,200.
Applications open: December 16th.
Filing fee: Free (when filing online) starting at $48 with professional help
Jackson Hewitt is able to send funds into a checking account or loan your refund onto their prepaid debit card. Jackson Hewitt has one the earliest application dates if you need your refund as soon as possible. This longer-term loan comes with a higher interest rate rate as well at about 2% of your total refund.
Loan amount: $250, $500, $750, $1,000, $1,500 or $2,000
Applications open: January 4th.
Filing fee: Free (when filing online) to $90 with professional help
TurboTax offers a tax refund advance between $250 and $2,000 depending on the size of your tax return refund. There are no loan fees and no interest, and you can receive money within 1 hour of IRS acceptance of your tax return.
Note that the amount of your refund advance will go on your Turbo Visa debit card. A physical copy of the card is mailed to you in 5-10 pieces but you can start spending online with your card information a few hours after you are approved. You’ll be limited to only use the money at places that accept a Visa debit card. In addition, once the IRS distributes your tax return, TurboTax will subtract out the amount of your refund advance plus any other fees and put the rest of the money on your Turvo Visa debit card.
TurboTax works with First Century Bank, N.A. Member FDIC as the 3rd party lender so you won’t be borrowing money from TurboTax.
TurboTax tends to charge the least amount in filing fees and offers an advance of up to 50% of your expected return. These funds can only be used through TubroTax’s visa prepaid debit card, limiting the ways to spend these funds.
Liberty Tax works with the lender Republic Bank & Trust Company to offer tax refund advances with amounts between $500 and $6,250. The loan amounts are based on the expected Federal refund minus fees and loan approval is subject to underwriting and approval. Note that unlike tax refund advances from H&R Block and TurboTax, there is a finance charge that comes out to a 35.99% annual percentage rate of interest (APR).
Other details such as the disbursement method and specific approval requirements about the tax refund advance from Liberty Tax is not available online.
Although a tax refund advance can come in really useful around tax season, there are many alternatives as well:
The best way to avoid relying on these loans is to file early and file free through the IRS and have the funds directly deposited into your account. A great resource to use is the IRS’s Free File page. The IRS provides a list of resources to help you file your taxes online for free. Many of the larger tax preparation services all so offer free tax preparation services depending on your income. Each company offers free service to a different bracket, providing many options no matter your income.
Some major banks may also offer Refund Anticipation Checking accounts if you do not currently have a checking account for e-file. Online banks such as Ally, Simple, or Capital One offer checking accounts which are simple to set up. You can use these new accounts to deposit your refund without needing to pay the additional fees of a tax preparer.
There are usually no credit score requirements associated with getting a tax refund advance. Some tax preparation companies such as TurboTax work with lenders like First Century Bank that don’t seem to check your credit at all. Others like H&R Block and Liberty Tax, through their lenders, may do a credit check in the form of a soft inquiry. A soft inquiry won’t hurt your credit score but tax preparers and lenders will access your credit history and have credit information about you when they are deciding whether to approve you for a loan.
A tax refund advance or loan can be useful if you need money fast. But consider all of your options, such as a loan with Possible before deciding to use a tax refund advance.
There are many alternatives to a tax refund advance without having to commit to the same tax preparation service that is doing your tax refund advance. In addition, read the fine print and understand that a tax refund advance is a loan.
If you need short-term funds and would like to keep the process as hands-off as possible, Tax Refund loans may be a good fit. The fees are high and the risks still remain but there isn’t a more simple loan than a single, automatic payment.
As with any lending decision we recommend doing your research beforehand. Something that can be difficult with Tax Refund Loans. Reach out to your bank or credit union for more information on lending opportunities. If you’re concerned about your credit, consider a loan from Possible. Our installment loans are broken down into four equal payments and designed from the ground up to help build your credit.