Tax Refund Loans: Are They A Good Idea?

When people have completed their tax return and realize that they will be getting a tax refund, many seek something called a tax refund anticipation loan. In this article, we will take a look at what this is and whether it is a good idea to take advantage of these loans.

Each year, my friend Calvin has his tax returns prepared by H&R Block.  Since he typically has too much money withdrawn from his paycheck each pay period, Calvin is always told that he is due a tax refund by the tax preparers.  Then, they offer Calvin something called a tax refund advance loan.

What is a tax refund advance loan?

A tax refund advance loan, also called a tax refund anticipation loan, is a way for you to receive your tax refund sooner.  This sounds like a good idea, does it not?  "Money in the hand" is always better than money we will see down the road.    Or is it?

As with everything in life, nothing is for free.  What would be the incentive for someone to simply pay you your tax refund advance and get nothing in return?  There is no incentive and that is why the tax preparers and the payday loan companies, who also provide these types of loans,  provide you this service for a fee, sometimes a very large fee!

Let's look at what is really happening when you receive a tax refund advance:  You are borrowing your own money!  Do you really want to pay to borrow your own money?

How much are you willing to pay to borrow your own money?  Let us say that you are due to receive a refund of $1,000 dollars as a refund from the government.  Your tax preparer, who did your taxes, then offers to pay that money right there and then, minus what he will tell you is a "minimal" loan fee.

This "minimal" loan fee varies per company.  Sometimes, it is about $30 but other times it can reach more than $100.  Many companies also charge administrative fees up to $50 and electronic transfer fees.  All of this may amount to between $100-$200.  If you are due $1,000, and you pay $200 to get it sooner, you are essentially paying 20% on your money in one day.

Plus, in today's electronic environment, you can receive your tax refund electronically in as little as 14 days.  You can wait 14 days, can you not?

Thus, unless you have an absolute emergency, you probably do not want to elect to go with a tax refund anticipation loan.

And, to avoid this entire situation next year, you can change your withholdings so that the government does not keep all of your money and you will have it accessible throughout the year.