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Four Reasons Why You Shouldn’t Pay to Get Your Tax Refund Early


You need cash – fast!  And you’ve heard of people getting their tax refund early.  Sure, they have to pay a little bit, but it’s totally worth it, right?  It’s got to be way better than taking out a loan or getting another credit card, right?

But did you know that those who are getting their tax refunds early are actually taking out a loan against their tax refund? 

Just the same as if you were buying a car, and you took out a loan against the car you were purchasing.  Or if you took out a mortgage, against the house you intended to buy.

An early tax return is no different.  It is simply a short loan (often no more than two weeks) against your tax return.  And you pay dearly to receive the loan. 

Okay, you think.  So what?  It’s still a cheap solution to your problem!!

But before you apply for that tax refund loan, consider this:  you will be paying someone else to give you access to your own money.

Sure, you are getting it a couple of weeks earlier. But the result is still the same:  you are borrowing against your own money, and you are paying someone else to have access to your own money.

A tax refund loan might look like a good option on the surface, but there are four really good reasons NOT to take out that tax refund loan:

  1. The Fees for These Loans Can Be Incredibly High
  2. The Fee May Be Subtracted from Your Refund
  3. You May Not Receive Enough of a Refund to Cover Your Loan
  4. You Are Paying Someone Else for Access to Your Own Money

In this article, I will explain what a tax refund loan is, why you might consider applying for one, and why you should rethink that decision.  But, if you must apply for a tax refund loan, I’ll walk you through a few things to look for. 

And finally, I’ll leave you with a few alternatives; other things you can try, instead of applying for a tax refund loan.

A tax refund loan is not typically the best answer.  But there are some instances when it may be your only option.  If that is the case, you should know what to expect.


What is a Tax Refund Loan?

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Just like it sounds, a tax refund loan – or a refund anticipation loan, as it is formally known as - is a loan given to you, based on what you are expected to receive from the IRS in your tax return. 


A Tax Refund Loan is a Loan Based on The Amount Your Expected Tax Refund

If approved, you will receive a loan from your tax preparer based on what you are getting as a refund.  Often times, these loans have limits on them, such as $1,000, and are actually coming from another lender, such as First Century Bank.

You can usually get a tax refund loan as early as three weeks before you’d actually receive your tax refund.  This, of course, can make a tax refund loan highly desirable.


How Does a Tax Refund Loan Work?

Before 2012, tax refund loans were very similar to payday loans.  You received a loan in the amount of your tax refund, that you could immediately spend.  In return, you paid huge fees and interest, often times costing almost as much as your refund.

Around 2012, regulations were set to make it harder for tax preparers to offer tax refund loans. This is because lenders and organizations were taking advantage of lower-income families. Today, tax refund loans are a little less painful than they were back then.

To qualify for a tax refund loan, you actually need to have your taxes done by a tax preparer.  You will also need to fill out an application for a tax refund loan, which may or may not be approved, based upon your credit score.

If approved, you usually receive your loan around two to three weeks before you would actually receive your tax refund.  Sometimes, you can receive your loan as soon as your tax return is accepted by the IRS.

The funds are usually distributed through a debit card, a check, or through direct deposit.  Additional fees are usually associated with each one of these distribution options. 

When your actual refund is available, it is sent to your tax preparer, to pay back your loan.  If there are any additional fees that your tax preparer needs to collect, he or she will take them out of the refund.  Your tax preparer will apply whatever is left to the balance of your loan.

If you received more in your refund than you took a loan out for, you will receive that balance from your tax preparer.  If you received less in your refund than you took the loan out for, you will owe your tax preparer the remaining balance due.


Why Might You Consider a Tax Refund Loan?

There are many reasons why someone might consider a tax refund loan.  In the end, the underlying reason is that you need cash – and fast – and you think you have no other options.


You May Consider a Tax Refund Loan Because You Are Faced with an Emergency

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In some instances, a tax refund loan might seem like a good option.  Maybe you are faced with an emergency – medical bills, for instance, and you have no other option.

“Emergencies” are all in perspective, though.  Keep in mind, when considering a tax refund loan, that what is an emergency to one person may not necessarily be an emergency to another. 

For instance, if you had a recent surgery completed, and you do not have the money to pay for it, it may feel like an emergency. But there may be other options.  Perhaps all you need to do is contact the hospital or clinic and speak with the billing department. They may be able to work something out for you.

If you think you have an emergency, take a moment to collect your thoughts.  Try to determine if it is a real emergency.

➤  What will happen if you can’t pay for this expense? 

➤  When will that happen? 

➤  Do you have time to come up with another plan before then? 

➤  What are some other options that you might not have considered?


You May Consider a Tax Refund Loan Because You Have Poor Credit

Another reason you may consider a tax refund loan is because you have poor credit, which limits your options.

If you have poor credit, it may be hard to qualify for a personal loan, or to apply for a credit card, both of which are options for someone with better credit.

When this happens, taking out a loan against your tax refund might seem like the best option.  But before you do that, exhaust all other options first.  Keep in mind that a tax refund loan only gets your refund to you a couple of weeks earlier than actually waiting for your refund can deliver the funds.

It may not be worth it to spend all of that money financing a loan if you can wait just a couple of weeks.

If you have poor credit, and need your tax refund to cover some upcoming expenses, ask yourself these questions before applying for the tax refund loan:

➤  Do I need the money now, or can it wait a couple of weeks?

➤  Can I qualify for a personal loan or a credit card?

➤  Have I looked into a credit union?

➤  Is there a friend, or a relative, that I can borrow the money from, and pay them back with my tax refund?


You May Consider a Tax Refund Loan if You Have Trouble Delaying Gratification

Some people really struggle with instant gratification – meaning they just cannot wait!!  And you may consider a tax refund loan if you struggle with waiting as well.

There are many reasons why someone may struggle with waiting for a tax refund.  For instance, many low-income families struggle all year to cover their expenses. When tax season rolls around, they finally have a little extra money to have fun with!

It can be hard to wait for those funds to roll in. Especially when you have had to deny yourself all year long.

If this is you, consider the money you will be paying out, in fees and expenses, to receive your tax refund earlier.  And then think about all of the fun things you can do with that extra money. Do you really want to give it to a tax preparer?

If the urge hits to apply for a loan so that you can go have fun just a little bit earlier, picture what you can do with that extra money.  Hold on to that image when it gets hard to wait. 

It’ll be worth the wait!!


Why You Should NOT Use a Tax Refund Loan


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The reasons for applying for a tax refund loan can be compelling. 

It can be hard to wait for something when you’ve struggled all year long.  You may feel like you deserve to have a little fun – finally! 

And if you have bad credit, but need the funds, a tax refund loan can be an easy solution.

If you are facing an emergency, it can often be hard to step outside of that situation, to determine if it is a real emergency or not. 

But no matter what your reason, and how compelling it may be to consider a tax refund loan, there are a few reasons why you should not use a tax refund loan.


The Fees for a Tax Refund Loan are Incredibly High

When you receive a tax refund loan, you end up paying about 10% of your tax refund in fees to your tax preparer. 

That means if your tax refund is $1,000, you will pay $100 in fees.  If you are accepting a tax refund loan for $3,000, you will pay $300 in fees.

Think about what you could do with that extra $100 or $300, if you waited just two weeks to receive it?

Not only are the fees high for a tax refund loan, but there are often quite a few different fees that you have to pay.  You could pay an interest rate, a loan processing fee, and receive additional charges for however you decide to accept your funds.

If you pay a loan processing fee, you have to pay that fee for both your federal and your state refunds. 

That means if you are receiving $500 back from the state, and $500 back from federal, and you are taking a loan out for $1,000, you could end up paying a processing fee twice – one for your state refund loan and one for your federal refund.

You may also have additional charges based on how you receive your tax refund loan.  For example, you might have to pay an extra $30 to receive the funds via check, or to have them loaded onto a debit card.


The Fees May Be Taken Out of Your Refund

If you found a tax preparer who does not charge any fees up-front, that may seem like a win-win situation.  But what actually happens in most cases like that, is the tax preparer ups the price to do the taxes – for everyone, not just for you. 

That way he or she can recover the costs of giving you your tax refund loan for free.  So, in a sense, all of his or her customers pay for your loan processing fee.

Another way that your tax preparer will recover his or her costs is to simply sell you on additional services that you do not need.

The fee for your tax refund loan could also just be taken out of your refund, meaning you don’t pay anything up front. But when your refund comes in, your tax preparer will take the fee out of the actual refund, so you will receive less of a refund.

Sometimes, if you cannot pay the processing fee up front, the tax preparer will charge you an additional fee, for taking the fee out of the refund!

This means that when your refund comes through, he will take your processing fee out of your refund.  And then he will take an extra fee out of your refund because you could not pay the processing fee up front, when you applied for your tax refund loan.


You May Not Receive Enough of a Refund to Cover Your Tax Refund Loan

In some instances, your tax preparer could tell you that you will receive a certain amount back and give you a loan based upon that amount. 

But then, when your refund comes through, it could be less than what was anticipated.  And you will be stuck paying back the difference.  How could this happen?

Your tax preparer is human, and humans do make mistakes.  So, he or she could have simply made an error on your return.  If that happens, you are still liable to pay back your loan, in full.

Or, if you had unpaid child support or a tax lien, you may not get back your full refund.  You will receive what is left of your refund, after those expenses are taken out of it.  And if that happens, you still have to pay back your tax refund loan in full.

It’s far better to just wait the couple of weeks, and then spend the actual refund you receive, rather than guessing on what you may receive, and taking a loan out against that.  That way you don’t end up owing more money than you actually received.


If You Take Out a Tax Refund Loan, you are Paying Someone Else for Access to Your Own Money


Photo by bruce mars from Pexels

It’s your money – it’s your tax refund!!

And you are willingly paying someone else to let you have your money.

You are handing over a large amount of cash to someone else, simply so that you can get your own money just a little bit earlier than you otherwise would have.

Or, you are agreeing to receive less money, simply so that you can get your money just a little bit faster.

It makes more sense to wait!!  And pocket all of your money, not just 90% of it.

Otherwise, someone else is making good money on your inability to wait.


What to Look for, if You Do Decide to Use a Tax Refund Loan

Still, there are some circumstances where you need money.  NOW.  It may be a life and death situation.

And if that is the case, a tax refund loan might be your only option. So, before you decide to dive head-first into the process, there are a few things you should consider.


Consider a Fee-Free Tax Refund Loan

Fee-free tax refund loans are being offered more and more, as a promotional deal, from larger tax preparers, such as H&R Block.  These fee-free refunds are often referred to as a refund advance, rather than a tax refund loan.

This sounds like a great option, because you rarely pay interest fees or processing fees.  However, it is worth mentioning that in order to receive a refund advance, you need to have your taxes prepared by a tax preparer, such as H&R Block. 

And this can cost anywhere from $29 to $200, depending on your situation.  You also often have to attend the appointment in office, rather than applying on-line.


Stay Away from Lines of Credit, if You Consider a Tax Refund Loan

Some tax preparers offer a line of credit, rather than a tax refund loan.  For example, H&R Block offers the Emerald Advanced – a line of credit available in November, based upon your anticipated tax refund.

The loan needs to be paid back by February 15th of the following year.  And as long as the loan is paid back by then, the borrower has the option to hang on to the loan – or line of credit – for the entire year.

This sounds good, in theory, because you have access to a line of credit anytime you find yourself in a sticky situation.  But the fees for this line of credit are incredibly high.  It’ll cost you more, in the long run.


Stay Away from High Interest Rates

If you take out a tax refund loan, you are literally borrowing money, and only for just a couple of weeks.

Yet, you still have to pay interest and other such fees, on this loan, just like you would on any other loan.

When you figure out the fees and interest that you have to pay on this loan, and convert it to an annual percentage rate (APR), it can be quite high – around several hundred percent!!

Even the 36% APR that you can get for the Emerald Advanced Line of Credit from H&R Block is incredibly high.

In essence, you are paying someone else mega bucks just to get your money a couple of weeks earlier.  So, shop smart, if you need to consider a tax refund loan, and find one with low interest rates.


What to Do Instead of Taking Out a Tax Refund Loan

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You may find yourself in a situation where taking out a tax refund loan seems like the only thing you can do.  But before you take the plunge, see if any of these options will help you out:

  1. File Your Tax Return Early

In some instances, you can file your tax refund as early as January 1st, or as soon as the IRS     starts accepting them.


  1. File Your Tax Return Electronically

Filing electronically will speed the process up.  You can get your refund in around 21 days, if you file electronically.  If you file by mail, you can expect another four weeks to be added to that 21 days.


  1. Use Direct Deposit

If you use direct deposit, you cut out the need for a check to be printed and mailed to you. This can eliminate at least a week of wait-time.


  1. Lower the Amount You Typically Get as a Refund

If you find yourself continuously relying on a tax refund, it may mean that you need that extra money throughout the year instead.  If you typically receive a large refund, it might make sense to lower the amount you are receiving as a refund.

To do this, simply adjust the number of withholdings on your W2.  That way, you will receive more money in your paycheck throughout the entire year, and less as a refund.

  1. Consider Using a Tax Advance Instead of a Tax Refund Loan

      As mentioned above, a tax advance can be a better option than a tax refund loan.


  1. Take Out a Personal Loan or Apply for a Credit Card

Consider applying for a personal loan or a credit card, if you need the money for an emergency.  You may be surprised at your options, even if you do think you have poor credit.


  1. Pick Up a Part-Time Job

Consider going ‘old school’ and moonlighting for a bit. Sometimes you can find a part-time, seasonal, or temporary job that will help you cover the upcoming expenses.  Then you owe no one anything.


  1. Borrow from a Friend

If all else fails, consider borrowing from a family member or a friend, and paying them back with your tax refund, when you receive it.  Typically, family members do not charge processing fees and interest, as a tax refund loan would. 


  1. Sell Things You No Longer Need

Our houses are usually over-flowing with items we no longer want or need.  If you need extra money, take a look at what you own. See if there is anything you can sell, to bring in a little extra income.


Tax Refund Loans are Usually Not the Best Option

You might find yourself faced with an emergency, and you might feel like you have very little options. When your back is up against the wall, it might seem like a tax refund loan can be a quick win.

But you need to keep in mind that tax refund loans are very expensive.  You can pay up to 10% of your refund in fees and interest, just to receive that loan.

And a tax refund loan is still a loan.  You are taking it out against your tax refund, just as you take a mortgage out against the house you are going to buy, or a car loan out against the car you are going to buy. 

A tax refund loan, however, is a very short loan – you typically receive it for only a couple of weeks.  And then, when you tax refund comes in, the refund pays off your loan.

If you did not receive enough of a refund to cover the loan, you are stuck paying off the rest of that loan balance, just like you would with any other loan.

In conclusion, tax refund loans cost a lot of money and are not always the best option.  It is so much better to wait a couple of weeks and receive your tax refund – in full, debt and worry free.

Why pay someone else to get access to your own money?


If you feel like your back is up against the wall, and you need help figuring out your options, then contact Inter-County Community Council to see what programs are available to help you and your family.  Call 888.778.4008.  You can select the option for a specific program or dial 0 to have the front desk help you determine what program might be helpful for you.



Author Byline:


Shannon Lambert is a freelance writer for hire who offers ghostwriting, copywriting and blogging services.  She works with businesses and nonprofits, providing engaging content that educates their readers.