Source: The College Investor
With tax season quickly approaching, you’re probably seeing ads for refund anticipation loans. Refund anticipation loans (also known as refund advance loans or tax refund loans) are a form of secured debt.
A lender (usually a tax preparer) will give you an advance on your tax refund (often up to $3,000). In exchange, the tax preparer will pay the loan back (both principal, interest and fees) when the refund arrives at the preparer’s office. Then the remainder of the refund will then be passed to you. These are some of the pros and cons of taking a tax refund advance loan.
Now, here’s what you need to know about tax refund advances.
Related: Best Tax Refund Advance Loans
Pro: They Can Be a Great Way to Pay Off High-Interest Debt
Are you carrying high-interest credit card debt? If so, an interest-free tax advance loan could help you pay off this debt once and for all. Of course, most tax refunds come within six to eight weeks of filing, so the loan itself will only save you a month or two worth of interest costs. But if getting the loan today will help you pay off debt and avoid it in the future, I think it’s a great move.
H&R Block offers interest-free loans with their Tax Refund Advance program. This program offers up to $1,300 with a 0% interest loan. You have to get this loan in-store when you meet with a tax professional. But they do offer same-day approvals - if you’re approved, you’ll get a text or email with your tax refund advance loan amount.
As soon as you get that text, you can access your money immediately - funds will be available on your H&R Block Emerald Prepaid Mastercard or in your Spruce banking account.
Pro: You Don’t Need Great Credit to Qualify
People who have bad credit or limited credit history often struggle to take out loans. But tax refund loans are backed by the refund that you’ll get from the IRS. Because of that, you don’t need good credit or any credit to qualify for the loan.
From January through April, a tax refund loan can be a great way to get money quickly (make sure you check the timeline - different companies offer loans at different times). If you can qualify for a zero percent interest loan, and use it to pay off payday loans or credit card debt, you may as well take advantage of it. Especially if you don’t qualify for a 0% interest credit card.
You can get a 0% interest loan with H&R Block’s Tax Refund Advance.
Con: Traditional Tax Refund Advance Loans Are High-Interest Debts
Of course, paying off high-interest debt only makes sense if the loan is a low-interest debt. Traditional refund advance loans often carry origination fees or other fees that turn them into high-interest loans. You may see these loans advertised at Cash Advance shops or on yard signs in neighborhoods. In general, these “traditional” refund advance loans are a rip-off.
Because the loans are held for such a short amount of time (less than two months), the real interest rate (called the annual percentage rate) could be in excess of 100%.
If you’re paying any amount of money for a refund advance loan, you’re probably paying an excessive interest rate. Be careful to avoid ripoffs by asking a tax preparer or lender about interest and fees.
And remember, when you file electronically (for example through a site like TaxSlayer, TurboTax or H&R Block), you’ll generally get your refund in as little as 21 days.
Con: Figuring Out the Loan Details Can Be a Challenge
Related to carrying high interest, understanding tax refund loan details can be a challenge. The interest on the loans may be calculated as a set fee rather than a traditional percentage.
On top of that, the short amount of time that you’ll hold the loan makes the real cost of borrowing very high. With so many moving parts, traditional refund advance loans (where you’re actually paying to borrow money) are not the best way to borrow money.
Con: You Are Unlikely to Build Your Credit
Reporting practices for tax refund loans will vary from lender to lender. However, most lenders won’t bother to report your tax refund loan to the major credit reporting bureaus. Because of that, the loan won’t help you build credit.
You can learn more about building your credit here.
Final Thoughts
Tax refund loans are complicated. There are different rates, terms, and considerations you need to think about before taking one out.
Furthermore, with most people getting their tax refund within 21 days of filing (but remember, tax filing season doesn’t even start until the end of January - see the tax refund calendar here), do you even need a loan or can you wait?
You can even get your tax refund early with various banks that offer early direct deposit.
The bottom line is that a tax advance refund loan may not be the best option for you.
Editor: Clint Proctor Reviewed by: Chris Muller
Robert Farrington is the founder of The College Investor and is widely recognized as one of the nation’s leading voices on student loan debt and saving for college. He holds an MBA from UC San Diego Rady School of Management and has spent over 15 years researching, writing, and advising on student loans, 529 plans, financial aid programs, and saving and investing for young professionals.
Robert has been featured in the The New York Times, The Wall Street Journal, The Washington Post, NBC News, and Forbes, where he has been a regular personal finance contributor for over a decade. His work combines both professional expertise and personal experience – he successfully navigated his own student loan repayment journey and has helped thousands of readers do the same.
He is committed to making the intersection of personal finance and education transparent and accessible. You can learn more about Robert on the About Page or on his personal site RobertFarrington.com.