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Tax Refund Anticipation Loans: Cash Advance for Emergencies

July 17, 2020 by Daniel Azzoli

blue post-it note saying tax time! stuck on folder with 1040 income tax form in the background

As tax season comes and goes, some Americans look forward to filing their taxes. That’s because the IRS may be cutting them a big check if they’re due a return.

No matter its size, your return may already have a place in your budget. But it is possible that you could come across an unexpected emergency while you’re waiting for your return to arrive.

In that case, a tax refund anticipation loan helps you get some cash faster than the IRS can process your return, but you may pay a significant cost for the trouble.

Today, we’ll share the ins and outs of these tax refund cash advance emergency loans to show you how they work before moving on to their alternatives and the benefits of getting your money online.

 

 

What is a Refund Anticipation Loan?

A tax refund loan is a loan based on the estimate of your refund amount made by a tax preparation service.[1] You’ll have to file your taxes before you can apply for this loan.

This intrinsically links your potential borrowing limit to your refund as you can only get a portion of the refund. At the offset, you won’t be offered a loan that’s twice the size of your estimated refund.

How Much Do You Get?

Since your tax preparer bases its loan on your estimate, looking at your past refunds may give you some idea of what you might get, but only if nothing has changed with your finances since that year began.

Last year, the average tax refund was $3,125,[2] but the amount you may be eligible for with a tax anticipation loan will vary based on your estimated return.

calculator on top of paper next to uncapped pen file folders and book on income tax

How Quickly Will You be Approved?

Tax refund cash advance emergency loans are a type of short term loans. In some cases, it may take minutes to be approved.

You typically have more than 24 hours to repay your loan, but your repayment terms are still relatively short.

According to the Consumer Financial Protection Bureau, your terms generally last as long as it takes the IRS to issue your refund to your tax preparation service.

How Does a Tax Refund Advance Work?

A tax refund loan isn’t a typical personal loan issued by a financial institution. The only way you might get one is by filing your taxes with a tax preparation service that offers these loans.

Unlike online direct lenders, these tax preparers don’t facilitate these loans on their own. They partner with a third-party to finance your cash advances.[3]

How Much Do They Cost?

Like all personal loans, a refund anticipation loan isn’t free. There may be fees, service charges, and even interest applied to your advance. You must pay these charges when you repay your loan.

In some cases, these fees are a considerable price to pay considering their relatively short terms.

What if I Have Bad Credit?

If you have bad credit and you’re stressed because of it, reading these motivational quotes may help you manage it, but you’ll need to balance it out with practical advice about borrowing. That’s because your credit score may stand in your way of getting personal loans from traditional banks. But institutions that offer tax refund cash advance emergency loans may consider factors other than your credit score.

Usually, a lender may check your credit to assess your creditworthiness, to better understand the chances you’ll repay what you owe by the due date.

However, with a tax advance loan, your creditworthiness may not be the only factor in the lending decision.

Tax preparers may have their own checks and balances. They may look into your tax file to confirm you don’t have liens against your refund. A lien is a legal claim against your refund, and the IRS may apply one to your file if you owe back taxes.

Questions to Consider Before Applying

If you still think a refund anticipation loan sounds like a good idea, don’t apply just yet. Ask yourself the following three questions first.

1. How Much Will it Cost?

This is an important question to ask any time you apply for a loan — whether it’s in the form of payday loans, installment loans, or lines of credit. But it’s especially crucial when it involves expensive tax refund advance loans.

Due to their shorter term length, they may end up being expensive. You also have to consider any additional charges that might pile on top of these fees.

Many tax refund loan services will only offer you an advance if you file your return through them at an added cost. Some lenders may also put your refund anticipation loan on a prepaid card, which may come with monthly charges, annual fees, or even interest.[4]

Even these small fees add up, so consider every charge that may apply before you make your final decision.

2. Do I Qualify?

You must have a refund coming to qualify for a refund anticipation loan. If you’re not getting a refund — or if you usually owe the IRS money — you probably won’t be able to get a tax refund advance, even if you wanted one.

Broadly speaking, owing money to a federal organization may offset a refund, which may disqualify you from getting a cash advance.[5]

Check the list below to see which debts may interfere with a tax refund loan:

  • Child support
  • Federal nontax debt, such as student loans
  • State unemployment compensation
  • Spousal support

3. Is it Safe?

Your tax documents are full of personal information. You have to share your address, employment information, and Social Security Number (SSN) in your file.

These pieces of information are confidential, so it’s essential you only ever share it with a legitimate organization.

The IRS makes it on this list of worthy organizations, as do many licensed accountants or tax preparers you plan on using to file your return.

But just to be safe, research any service that advertises tax refund cash advance emergency loans. You want to make sure they are reputable, and they take your security seriously.

Alternatives to Tax Refund Cash Advance Emergency Loans

Tax refund cash advance emergency loans may come with high rates and fees which may be difficult to afford. Before you lock into a loan you would find challenging to repay, consider alternatives.

Try Other Personal Loans

If there’s no way to put your emergency on hold until you get your refund, look for cash advances or installment loans from another source.

Looking for loan companies in your state is a good start.

You may come across online direct lenders who work with you directly. This means that they are only the lender you apply with and they will have control over your loan at every step. 

Still have questions about what a direct lender is? Check out these FAQs about online borrowing to find the answers.

Browse around to make sure you get the best possible rates for your needs. You may get a quick cash loan, even if bad credit usually stands in your way. Just make sure you can afford these alternative cash loans before you apply.

Things to Keep in Mind

If you’re considering a tax refund anticipation loan, there are a couple of additional factors you’ll want to keep in mind.

Filing Electronically

The way you choose to file your taxes significantly impacts how long it takes to receive your refund.

Electronic tax returns with direct deposit typically deliver your refund the fastest. According to government figures, nine out of ten e-filed returns with refunds are processed in 21 days.[6]

Doing it the old-fashioned way adds steps that can slow down the entire process.

You have to fill out a paper return and mail it, allowing the USPS several weeks to deliver it to the IRS. Once the IRS receives your return, it could take an additional eight weeks to process it.[7] From there, you may be waiting several more weeks for a paper check to arrive by mail.

Slash this wait time by embracing digital returns. You may receive your refund in a fraction of the time by filing your return electronically.

Adjusting Your W-4

If the IRS cuts you a check every year, you may want to review your W-4. This tax document is one of the forms you typically sign at the start of a new job, and it determines how much tax gets taken off each paycheck.

One of the reasons why you may receive a refund at the end of a tax year is that you held back too much of your income for your tax bracket.

If you need help juggling monthly bills consider reducing how much tax gets taken from your income. Doing this may help you see more money each payday.

According to the IRS, reviewing your W-4 should be a yearly chore.[8] Go back to this document to confirm you’re withholding the right amount of tax. This way, you don’t have to wait until tax time to get your money back. It will be in each paycheck as you earn it.

file folders showing taxes and receipts

Bottom Line: Do Your Research

An unexpected emergency with a tight deadline may put pressure on your finances. Tax refund cash advance emergency loans may seem like they offer some relief, but they may also come with costly fees and conditions.

You may end up spending a lot just to get your refund a few days (or weeks) earlier. If you can wait, try filing online to rush the filing process. This way, you may get your full refund faster without borrowing against it.

But if you can’t wait, consider researching your options to uncover a better fit for your needs. If you have any questions about alternatives like online installment loans or lines of credit, contact us for more information.

 


 

[1] https://www.consumerfinance.gov/about-us/blog/tax-refund-tips-understanding-refund-advance-loans-and-checks/

[2] https://www.usatoday.com/story/money/2020/02/28/taxes-2020-my-refund-shrink/4823891002/

[3] https://www.experian.com/blogs/ask-experian/can-i-get-a-loan-against-my-tax-refund/

[4] https://www.thebalance.com/refund-anticipation-loans-315626

[5] https://taxpayeradvocate.irs.gov/get-help/offsets

[6] https://www.irs.gov/newsroom/irs-issues-nine-out-of-10-refunds-in-less-than-21-days

[7] https://www.irs.gov/pub/irs-news/at-01-48.pdf

[8] https://www.irs.gov/newsroom/tax-time-guide-irs-urges-taxpayers-to-check-their-tax-withholding-early-in-2019-paycheck-checkup-can-avoid-problems-next-year


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