What happens to most people after they file their taxes? Besides breathing a sigh of relief, those who know they have money on the way start to plan.
What do they plan? What they’ll do with that refund money, which could be:
- Adding to an emergency fund.
- Paying down debt.
- Putting it towards a down payment on a house or a car.
- Saving for a vacation.
- Going on a shopping spree.
As such thoughts start racing through your head, you may have the urge to have that money as soon as possible. One way to make this happen is by getting a tax refund advance loan.
You’ll see tons of ads for these loans around tax time, but before you give in to that temptation, let’s discuss whether or not they’re a smart financial move.
How Tax Refund Advances Work
Certain lenders know that the government tends to pay on time. And when you file a tax return, they feel that you’ll get that calculated refund with little risk involved.
In short, your tax refund is seen as a done deal. But since companies also know people get the urge to have that money quickly, they’ve started to lend “advances” to earn money in the process.
Here’s how the typical tax refund advance works:
- You complete your tax return and figure out the anticipated refund.
- The lender originates a loan that corresponds with how much you want to borrow and your refund amount.
- You get the loan almost instantly after filing your taxes.
- Once the IRS officially issues your refund, the lender gets paid by claiming the loan amount.
- If there’s any money left from the refund, it will be transferred to you.
As for how much money you can get from a refund advance loan, that number ranges from $6,400 down to $200.
Some advances come with no fees or interest charges. These are usually for the lowest amounts and are used as incentives to get you to use a tax preparation company.
Here are some companies that will do your taxes and may offer an advance in the process to hold you over until your refund is issued:
- H&R Block
- Jackson Hewitt
- Liberty Tax
The Benefits of Tax Refund Advances
The most significant benefit of getting a tax refund advance is liquidity. It can put cash in your hands should you need it for an emergency. By not having to wait weeks for your refund, you can get at least some of the money you need without having to wait.
If you can get the advance for free (read the fine print), it can be a no-brainer. And since the advance loan won’t impact your credit score, you won’t have to worry there, either.
The Drawbacks of Tax Refund Advances
Perhaps the biggest drawback of taking out a tax refund advance loan is the fees involved. These vary according to the company, but as an example, Jackson Hewitt charges a 2% fee on what you borrow, up to $6,400.
If that doesn’t sound much, remember that just waiting a bit longer could get you all of your refund with zero costs involved.
If you have savings, there’s really no need to get one. The IRS typically issues refunds a few weeks after you file, so using your savings as a cushion may be your best bet.
Lastly, some advance loans will be usable only via branded debit cards. This can result in additional transaction fees for ATM withdrawals.