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Tax refund loans: Too good to be true?
These loans promise a faster return on your taxes at 0% interest and no fees — but are they actually free?
If that term stirs up thoughts of predatory lending, that’s because tax refund loans used to be. Today, these loans are another way for tax preparation stores to up their foot traffic and they’re becoming increasingly popular.
A tax refund loan might be inexpensive if your tax forms are simple. But most people won’t actually be able to get one for free.
What exactly is a tax refund loan?
A tax refund loan is similar to an advance on your tax refund with 0% interest and no financing fees. These loans are offered by tax preparation services, which use them as a way of bringing in customers to their brick-and-mortar stores. This works because tax refund loans require applying in person to qualify.
It’s a fast form of financing: You can get your money in as little as one day. And there’s no need to make repayments.
Once your federal or state refund comes through, the tax service deducts your loan amount from your refund before sending along your money.
It’s an increasingly popular type of financing. And around 1.7 million Americans applied for one in 2017, according to a study by the National Consumer Law Center.
Who’s eligible for a tax refund loan?
Tax refund loan providers pay attention to standard eligibility requirements like your creditworthiness, age and income.
But the two most important factors in qualifying are:
- Having your taxes prepared in person. You can only get a tax refund loan from the company that’s also doing your taxes.
- Knowing how much of a refund you’re getting. You can typically find this out when applying through one of these services.
How much does a tax refund loan cost?
Tax refund loans don’t come with interest or financing fees. But that doesn’t necessarily mean they’re cheap.
Here are some of the costs that come with tax refund loans.
Tax preparation fees
While online tax preparation is sometimes free, in-office tax preparation often requires a tax filing fee.
Expect to pay something in the ballpark of $50 to $500 when filing your taxes in a store — though it can go a lot higher. The one exception is for those filing Form 1040EZ, the simplest of tax filings, which sometimes doesn’t require an in-store fee. Call ahead to make sure this option is available to you beforehand.
Is a tax refund loan worth it?
If you’re only expecting a return of $500 or $600, you might want to take advantage of one of the many free tax preparation options and take out a personal loan to cover your personal financial needs.
Think about it this way: You’re likely paying at least $100 in tax preparation fees to get your $500 return two months faster. When you do the math, that means you’re paying about 20% of your refund for the convenience of using it early.
If you’re considering this route, do the math to make sure it’s worth it for your needs.
Refund anticipation loansBefore a government crackdown in 2012, you might have come across refund anticipation loans. These loans functioned like a tax refund loan but came with high interest rates and fees on top of any tax prep charges.
It’s harder to find anticipation loans today, but they do exist. Look out for lenders charging:
- Application fees
- Technology fees
- E-filing fees
If you think you might be the victim of a predatory lender, file a report with the Consumer Financial Protection Bureau.
Prepaid debit card fees
Some services require you to sign up for a prepaid debit card to receive your refund. These cards often come with fees that can sneak up on you — like withdrawal fees, payment fees and even ATM decline fees. Fees are typically small — $2 or $3 for the most part — but they can add up over time, especially if you’re not aware of them.
You might be able to opt out of the prepaid debit card by asking for a check or having your loan deposited directly into your bank account. You probably won’t get your funds as quickly, however.
Who could benefit from a tax refund loan?
Aside from the 1040EZ tax filers, who often don’t have to pay anything for this service, deciding to take out a tax refund loan is not always an obvious choice.
Anyone who relies on tax refunds to cover basic personal expenses might benefit the most from a tax refund loan — if your expected refund is high enough to make the filing fee worth it.
You might also benefit from a tax refund loan if:
- You claim an Earned Income Tax Credit or Additional Child Tax Credit. These deductions could mean you’re waiting for more than $6,000 in tax credits that you need to support yourself and your family. But federal regulations require extra scrutiny for EITC and ACTC claims, possibly delaying your tax refunds.
- You file early. You might be able to get some of your tax refund before the holiday season, a convenience that possibly offsets fees, depending on the service you file with.
3 tax preparation services that offer refund loans
Refund loans haven’t been around too long, and few services provide them. They’re often called advances rather than loans, and are available for a limited time each year.
Jackson Hewitt offers Express Refund Advances, which are originated by MetaBank. MetaBank may have specific eligibility criteria that borrowers must meet.
|Loan amounts||$200 to $3,500|
|Types of fees||Tax preparation fee, prepaid debit card fees|
|Average tax in-store preparation cost||$230|
|Eligibility||Prepare your taxes with Jackson Hewitt in person and meet MetaBank’s eligibility requirements|
|When it’s available||January 2 through February 24, 2019|
|Speed||Within 24 hours|
Jackson Hewitt also offers a Go Big Refund Advance loan from $1,000 to $7,000 at a 35.9% APR. This loan program ends on February 3, 2019.
H&R Block’s Refund Advance loan is originated by Axos Bank and may come with additional underwriting criteria you must meet to qualify.
|Loan amounts||$500 to $3,000|
|Types of fees||Tax preparation fee, prepaid debit card fees|
|Average tax in-store preparation cost||$222|
|Eligibility||Prepare your taxes with H&R Block and qualify for an IRS refund|
|When it’s available||January 4 through February 28, 2019|
Liberty Tax® offers Easy Advance tax refund loans through Republic Bank & Trust Company, which might have additional eligibility requirements.
|Loan amounts||$500 to $6,250|
|Types of fees||Tax preparation fee|
|Average tax in-store preparation cost||$233 — additional finance charge may apply to advances over $2,500|
|Eligibility||Prepare your taxes at a Liberty Tax® store or participating location|
|When it’s available||January 2 through February 28, 2019|
|Speed||Within 24 hours|
Nora takes out a tax refund loan to repair her car
Considering these extra expenses, she finds that Jackson Hewitt is among the more expensive options:
- Jackson Hewitt: $230
- H&R Block: $147
- Liberty Tax®: $191
Next, she calculates the fees against the convenience of seeing her IRS refund early. At best, she’s paying about 15% of her $1,000 advance in fees.
After looking at potential fees, it’s clear to Nora which is least expensive: H&R Block. Knowing her only alternative is a payday loan, Nora chooses to take advantage of the safer tax refund loan, which doesn’t have the potential to result in more debt.
The next day, Nora goes to H&R Block, pays to have her taxes done and applies for an advance. And she’s soon back on the road.
4 alternatives to getting an advance on your tax refund
The fees for filing your taxes in person can be expensive. If your refund isn’t big enough to justify the costs, consider using a free online service and opting for one of these financing options instead:
- A personal loan up to $5,000. If you have one big expense you’re hoping to cover with your tax return, it could be worth it to take out a personal loan for that amount instead. Look for a loan that doesn’t come with prepayment fees so that you can easily pay it off as soon as you get your refund.
- Your credit card. Use your credit card to cover day-to-day expenses and then apply your refund to pay off as much of your card’s balance as you can. It could be a bit more expensive than a personal loan, but it might be cheaper than a tax refund loan.
- A short-term loan. Payday loans are more risky. But if you can afford to make payments on time and don’t qualify for another option, a short-term loan that you pay back within a few weeks or months might be a viable option.
- Direct deposit for your refund. You won’t get your money months in advance, but you can get your tax refund a bit faster if you ask for direct deposit instead of a physical check when filing your taxes.
Want a quick cash loan instead? Compare your options
If you rely on your tax refund to cover personal expenses, need it to offset the cost of the holidays or have an emergency that you don’t have the funds to pay for, getting a tax refund loan could be a safer alternative to other types of short-term financing.
They might also benefit people who’ve filed for tax credits that are subject to extra scrutiny by the IRS and take extra time to come through.
But tax refund loans aren’t free. If you weren’t planning on having your taxes filed by an in-store professional, you’ll be shelling out an additional $150 to $300 for this service.
If you’d like to explore more options for borrowing money this tax season, learn about other offers in our guide to small-dollar loans.
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