Why Tax Refund Loans Are Bad: Fees, Interest, and Risk

Last minute taxpayers are working to send their returns to the Internal Revenue Service before the tax year 2021 deadline on Monday, April 18, and they’re probably expecting a hefty check through their tax refund.

Some tax firms or other lenders may offer the option of accessing those funds sooner, in the form of a tax refund loanalso known as a refund anticipation loan.

regulatory bodies and advocacy groups They have warned about the possible disadvantages of loans, especially those that come with high fees or high interest rates. Personal finance experts generally do not recommend them.

Here’s what you need to know about loans this tax season.

What is a tax refund loan?

A tax refund loan is, simply put, an advance on your tax refund, said Matt Schulz, chief credit analyst at LendingTree.

It’s a way to borrow against your tax refund to get access to the funds right away: borrow the amount from a lender and give them the refund when you get it from the IRS.

“Unlike many loans, it’s not necessarily something you look for,” Schulz said.

Tax refund loans are usually offered by a tax preparation company, Schulz said. You won’t find them in your bank.

What are the pros and cons?

The advantage of a refund anticipation loan is quite simple: you get access to your refund amount right away, instead of waiting the days or weeks it might take to receive the funds from the IRS.

The low? “It may end up costing you,” Schulz said, in the form of interest or fees.

Some tax firms will offer you a tax refund loan at no charge, Schulz said. But you will have to pay the company to do your taxes for you.

“Even with a 0% loan, there’s probably still a minimum you pay to prepare your taxes,” he said. “So if you’re someone who’s already planning on doing their taxes, that may not be as important.”

Teresa Murray, director of the US Public Interest Research Group’s office of consumer watchdog, says the cost may outweigh the benefit.

“We really urge people to avoid any type of refund anticipation loan,” he said. “Anything where you’re borrowing against a refund that you haven’t received yet…it just has bad news written all over it.”

The North Carolina Consumer Council warns “think again” to anyone considering a loan against their tax refund.

“While getting a tax refund advance may seem tempting, these loans are actually payday loans for tax returns, and you should avoid them whenever possible,” according to the council’s advice on its website. “The full amount must be repaid, just like any other loan, even if your repayment is less than anticipated or ends up being no repayment.”

When can I expect to receive my refund?

The IRS issues more than nine out of 10 refunds in less than three weeks, according to your website. Taxpayers who filed electronically will get their refund faster than those who mailed their tax forms.

And the department is getting faster and faster at handing out refunds, Murray said. Now, some electronic filers can expect to see the funds in their bank account in just a few days.

“If you file electronically, you can receive your money typically in four to six days,” he said.

North Carolina taxpayers may get their state tax refund more slowly, but the upside is that the delay in accepting returns this year was due to a legislative reduction in individual tax rate.

Should I consider a tax refund loan?

Schulz said that if you really need the cash, and read the terms carefully, a tax refund loan can be an alternative to riskier ways to boost your bank account.

“Emergencies happen: job loss, medical emergencies, whatever the case may be,” he said. “(In that case), there are worse things you could do than a tax refund.”

And assuming you’ve done your taxes correctly, he said, a tax refund loan is a secured loan, with your actual refund serving as collateral. That makes it significantly less risky than, say, an unsecured payday loan with a sky-high interest rate.

Murray, on the other hand, warns against borrowing under any circumstances. She suggests waiting until she gets her refund, especially since it might not take long if she’s e-filed and set up direct deposit.

“If you’re so strapped for cash… find a friend or relative to borrow money for a few days,” he said. “Don’t go the refund anticipation loan route, because they’re ridiculously expensive…you’re paying with your own money.”

While this year’s tax filing season ends without the threat of a government shutdown, going forward that could make these loans even risky, according to the North Carolina Consumer Council.

“Frequent federal government shutdowns can make these types of loans more attractive if you want your repayment quickly, which can complicate things. Remember that the lender will not consider a delay in issuing your refund and will not release you from any obligation to pay the loan on time, ”says his website.

Schulz added that big tax firms, like H&R Block or Jackson Hewitt, only accept tax refund loan applications for a set period, often between December and February. So for those taxpayers, the window to apply for a loan may already have closed.

And Murray had one more piece of advice for those who haven’t applied yet: Start early next year.

“When you’re in a rush, you’re more likely to be careless,” he said. “Any time you have the words ‘careless’ and ‘IRS’ in the same sentence, it’s not a good thing.”

This story was originally published April 15, 2022 8:36 a.m.

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Hannah Lang covers banking and economic equity for The Charlotte Observer. She studied business journalism at the University of North Carolina at Chapel Hill and grew up in the same city as her alma mater.