This article is aimed at enlightening you on where to get tax refund loans and other perks of this loan.
For many Americans, paying federal income taxes means getting a refund. The IRS says the average tax refund in 2022 is $3,039, up 7.5% from the previous year. Taxpayers often rely on this money to build up retirement savings or save to buy a home.
But what happens when you need the money before the IRS can send you a refund? You may want to consider a tax refund loan. It works like other short-term loans, but the loan amount depends on your repayment amount. Reclaimed advances are also a common alternative. A financial advisor can help you budget for unexpected expenses and advise you on how to manage them as they arise.
What is a tax refund loan?
The tax refund loan is officially known as the Tax Refund Anticipation Loan (RAL). This is the loan that the lender makes based on your federal income tax refund. Lenders are usually small financial institutions. You may need to do a little research to make sure the lender is reputable. Many tax preparation services will also offer you a tax refund loan after you file your tax return with their service. Tax refund loans usually only last a few weeks — long enough for the IRS to process your refund.
The loan you get from the lender will be the down payment minus any fees or interest. You can get the loan on a prepaid card, by check, or as an electronic deposit into your bank account. Some lenders offer only one of these methods while others tend to offer multiple options. After the refund is processed by the IRS, it goes directly to the lender. At this point, your loan is paid off and you’re past tax season. The only other thing to keep in mind is that if your payment is less than a tax refund loan, you should still pay off the loan in full.
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How to qualify for a tax refund loan
Since tax loans are not as risky as unsecured loans the credit score requirements are generally not as restrictive. Your qualifications depend largely on how much the government will pay you.
Tax lenders will verify your identity, review your tax history with the IRS, and assess how much you owe. You should keep in mind that some lenders may also review your credit history. And if you want to pre-qualify as a candidate, you may need to provide your Social Security number, contact information, and the amount of the refund you received for the previous tax year.
Justifications for and against tax refund loans
The most obvious reason to consider a tax refund loan is that you need the money fast and on short notice. Maybe it’s February and you have a big bill coming up. Or maybe your emergency fund wasn’t big enough and you could already use up your tax refund. While the IRS usually issues refunds within 21 days of receiving your return (and it can take more than six weeks for a paper return), some lenders may be able to get your money back faster. , depending on your return options.
The most common recipients of tax refund loans are taxpayers who file at the beginning of the tax season and claim the Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC). Under federal law, the IRS cannot immediately issue tax refunds to people who claim these credits. For 2022, when you file your 2021 tax return, the IRS says the earliest you can receive your EITC/ACTC refund will be the first week of March.
So if you claim these credits and deposit early, you may have to wait longer than usual. If you are looking for a loan that will last more than a few weeks, a tax refund loan is not the best option for you. It also may not be a good idea if you suspect for some reason that you will not be able to pay the loan back in full. This may occur if the lender offers a high-value loan, slightly more than the refund. Possibly, you don’t know if you’ll be able to recover the difference when this happens.
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How much does a tax refund loan cost?
The main reason to avoid tax refund loans is that they are very expensive. In some cases, they look suspiciously like short-term loans – small, short-term loans at high-interest rates. Note that if you borrow money from a reputable tax preparation service, you may end up paying less than if you went through a third-party lender. Lenders usually charge a registration fee of up to $100. If they help you with your tax return, you will have to pay a filing fee (which can be around $40).
There will be other fees depending on how you obtained the loan. For example, getting your loan on a prepaid debit card could incur a $30 fee, while receiving a check could incur a $20 fee. Lenders may also charge some other small fees. In addition to the fee, you will have to pay interest on the loan. Your interest rate will be double digits and in some cases triple digits.
In total, you can expect to pay a 10% or more down payment just for a two-week loan. Indeed, if your refund is delayed or there are other problems, you will pay extra. Remember that the deadline for tax refund loans often comes early. So child support, arrears, student loans, and other factors can all reduce the amount you can expect the IRS to pay back.
Risks of a tax refund loan
The main concern of a tax refund loan is the cost. Make sure you understand all costs associated with the loan. For example, you may have to pay a penalty if your refund does not arrive from the IRS within a certain time frame. The last thing you want is a loan to default on. This will incur higher interest and costs.
Another concern is that you are getting less than you expected. In this case, you will be borrowing more than you received from the IRS and will need to find funds to pay off the loan.
This does not include additional fees and interest. You can estimate your refund using SmartAsset’s free tax refund calculator.
Sometimes the IRS will take longer than usual to process your refund. This could be due to an error in your filing process or simply because the IRS has a lot of paperwork to process (such as the beginning and end of tax season).
Other Choices other than a tax refund loan
Tax refund loans are often not worth the high cost, so here are some alternatives that may be better for you:
Wait for your refund. Yes, waiting isn’t always ideal, but if you file your tax return electronically and choose to receive your refund via direct deposit, the IRS can process your return in as little as a year or two weeks. In some cases, waiting two weeks is better than paying $100 or more on a short-term loan. Keep in mind that different deposit methods will take longer.
Reduce your tax refund. If you receive a large tax refund each year, it means that you pay a lot of taxes over the year. It’s nice to have a big check to pay, but you can also keep that money in your bank account for the year, which can help you avoid the situation where you run out of money and have to rely on a loan to pay. To do this, you need to fill out the W-4 more accurately.
This will take a little more planning, but it’s a good way to maximize your cash. Find a free cash advance. Tax Return Services is one of the largest lenders of tax refund loans. These services are often call them to cash advances and offer them primarily as a way to attract new customers. As a result, some cash advance loans are very cheap or free.
How does a tax refund loan work?
If a tax professional offers you a tax-free loan, you’ll have to give them the key to the tax-free. It works like this:
The tax preparer opens a temporary bank account for you and directs the IRS to deposit your tax refund into that account. Tax preparers will give you a loan in the form of a check, direct deposit, or prepaid debit card.
The refund amount is deposited directly into the retention account. The tax preparer will bear all of the loan fees (usually $30 to $50), plus the cost of preparing the tax return and paying the rest to you.
Then the temporary account is closed.
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How to get a tax refund loan
Tax refund loans work a little differently than any other type of loan. You cannot choose which tax refund loan to take out. Instead, it’s an additional service that tax preparers often (but not always) provides. In other words, you choose your tax preparer and it comes with the tax refund loan offered to you (if any). This means that you can’t get a tax refund loan unless the tax preparer finds out that the IRS owes you a refund.
Alternatively, if you have a tax bill because you haven’t paid enough taxes over the year, you get your money back and so you can’t get a tax refund loan. If you think you might get your money back and you’re interested in a tax refund loan, the best way to make sure you can get one is to find a tax preparer that offers this service.
Where can I get a tax refund?
Tax rebate loans are sometimes available from tax preparers, such as H&R Block. These loans may also be referred to as repayment advances or repayment prediction tests. However, the gist is the same: You get an immediate refund instead of waiting three weeks or more for the IRS to process your refund.
To get a tax refund loan, you need to find and hire a tax preparation company that offers a tax refund loan as part of their service. The IRS will then owe you a refund. Otherwise, you will not qualify for a tax refund loan. According to the IRS, about a third of 2021 tax filers did not receive a tax refund in 2022.
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Frequently Asked Questions
Where can I get a tax refund?
Tax rebate loans are sometimes available from tax preparers, such as H&R Block. These loans may also be referred to as repayment advances or repayment prediction tests.
How much does a tax refund loan cost?
Tax refund loans often come with steep fees. It’s not uncommon to pay as much as 10% of the total refund to get it back sooner. This means you can pay $200 to get $2,000 cashback early, leaving you with a total of $1,800. The fees for these loans can be equal to an annual percentage rate (APR) of 100% or more.
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However, tax refund loans and their expensive nature makes them not the best option for most people. After all fees and interest are deducted, you may have to put in a 10% or more down payment just to get a loan for a few weeks. If you urgently need financial assistance, consider taking a down payment instead. Tax preparation services like H&R Block and TurboTax hit you for little to no cost.