During tax time, it’s common to see advertisements claiming that you can get your tax refund “early,” or even walk out of a tax preparer's office with your refund in hand. Before you get too excited about this, understand that you are likely being offered a refund anticipation loan.
How Tax Refund Anticipation Loans Work
With a tax refund anticipation loan, the tax preparer completes your tax return and usually files it. You receive money now, and later on, when the refund comes in, you repay the loan. In some cases, the money you receive is less than the refund amount to account for fees and interest. In other cases, since there might be an adjustment to the refund (such as the IRS withholding some of it because of money you owe), you might only be offered half the amount of your refund. Again, fees and interest might reduce the amount you walk out with even further. In some cases, rather than provide your own information for a tax refund, you provide the information of the preparer on your return. So, when the refund is deposited into an account, it’s an account set up by the preparer to receive the funds. Once the refund comes, your loan account is considered paid off. In other cases, the loan is set up like any other loan. Your refund acts as collateral, and you are expected to make regular payments. When your refund comes in, you can pay off the remaining balance, or choose to complete the payment schedule.
Downsides to Refund Anticipation Loans
It’s important to be aware of the pitfalls associated with refund anticipation loans. First of all, most of these tax refund loans come with high fees and interest rates. You won’t get the full amount of your refund when you agree to this arrangement. It’s the price you pay for the convenience of getting your money now. Another downside is the fact that it is a loan, and can impact your credit score. While it isn’t likely to have a big impact, the reality is that it will have some impact. Your payment might be (but not always; it depends on the tax preparer) reported to credit bureaus. If something happens and your refund doesn’t cover the amount you owe, or if you miss payments, the tax preparer can choose to turn your account over to collections, which will have an impact on your credit situation as well. Finally, it’s worth noting that most people can now get their refunds fairly quickly. While the IRS doesn’t guarantee it, the truth is that you can possibly get your tax refund within seven days if you file your tax return electronically and agree to direct deposit. The turnaround time on refunds that include electronic transactions is fairly quick. Unless you are in dire straits right now, chances are that you can wait for your refund to arrive from the IRS, rather than paying the high fees and interest charges associated with a refund anticipation loan.