Editor’s Note: This story originally appeared on The Penny Hoarder.
When you know you have money coming your way, it can be hard to be patient. As you visualize all the opportunities to use that pending receipt, you start wondering how you can get it sooner.
When you declare your taxes, there is a tool to get your refund sooner: it is a tax refund advance. It is actually a loan against your prepayment.
Many companies offer them because they are relatively low risk compared to other loans. The lender sees your prepayment as calculated by a tax preparer and knows that the government is still paying the money it owes.
While these loans offer a way to get what’s owed to you sooner, know that all that glitters isn’t gold. These products often have a cost. Here’s what you need to know.
How does a tax refund advance work?
Tax refund advances provide almost instant access to cash while you wait to receive your tax refund. It’s basically a short-term loan against your future tax refund, providing cash until the IRS decides to issue your return.
After reviewing your tax return and identifying your expected repayment, a lender will give you a loan that is usually the amount you want to borrow and your expected repayment. Then they will extend that credit until the IRS issues your refund. At that time, the lender will claim the amount to satisfy the outstanding loan. The remainder of the refund will be transferred to you.
Some commonly used tax preparation companies offering tax refund advance loans this year include H&R Block, Jackson Hewitt and TurboTax.
Although the amounts available vary from company to company, reimbursement advance amounts can be as high as $4,000. The lowest loans available are $250 with no interest or fees. These lower amounts tend not to incur interest charges or fees. They serve to encourage you to prepare your taxes with one of these companies.
Some offer very small loan amounts before the end of the tax year with sufficient documentation from the current and last year to substantiate the need for a prepayment advance loan. For example, at Jackson Hewitt, you can receive up to $700 before your W-2 arrives as long as you can provide valid proof of income, such as a pay stub.
Benefits of a tax refund advance
Quick access to your money
If you’re short on cash, having immediate access to your cash can come in handy. Instead of having to wait three to four weeks to receive your refund via direct deposit or check in the mail, you can receive cash instantly via a variety of payment methods like branded debit cards. The loan is then repaid as your repayment comes into your possession.
Some reimbursement advances are really free
In that case, one of these products might make sense. However, be sure to read the fine print to make sure it is truly free and also to find out how you receive the funds.
No credit impact
Applying for a repayment advance loan does not affect your credit score.
Disadvantages of a tax refund advance
Funds are often transferred to branded debit cards
Some lenders require funds to be transferred to branded debit cards, which limits your ability to use the funds in some cases.
Normal debit card transaction fees, for example ATM withdrawal fees, still apply as they would for any debit card used at a non-member bank.
For example, with TurboTax, if you apply for a prepayment loan with the loan proceeds placed on a branded debit card for less than your refund, after the refund is processed, the remaining refund is also transferred to the card. brand credit. This is something to keep in mind along with how your total refund will be affected.
Alternatively, you can often have the loan transferred to your bank account, although this service may incur additional charges.
It doesn’t make sense if you have savings
You will usually receive a portion of your due refund within 24-48 hours of requesting the tax refund advance. But the IRS processes tax returns quickly. It usually issues any qualified refund within a few weeks of deposit.
If you have a financial cushion that can last until repayment, borrowing that money makes little sense.
The real costs are often higher than they appear
Although the fees and interest charges may seem small compared to the size of the loan, the actual cost may be similar or higher than credit card financing.
For example, Jackson Hewitt’s Go Big Refund Advance lets you borrow up to $2,500 for new customers and charges a 2.5% fee on the amount you borrow. (Jackson Hewitt also offers prepayment prepayments from $200 to $1,000 and no-fee prepayment prepayments from $200 to $3,500 without fees.)
If you applied for a loan of $2,500 under the Go Big Refund Advance program and incurred a 2.5% fee, you would actually repay $2,563 on the loan.
The interest you will often see quoted is assessed on a monthly basis. Interest rates of 3% to 5% are often advertised, but viewed on an annual basis this translates to an APR of 36% to 60%.
Should You Get a Tax Refund Advance Loan?
Although these loans are useful tools for providing liquidity, they can often come with exorbitant costs. However, not everything will cost you much. Sometimes they can actually provide a faster ability to use the funds – although access is limited as it goes through a debit card.
When you plan for your cash flow needs, you can view a tax refund as a self-induced bonus to your income because you receive a decent check from the IRS. However, viewed differently, you are also wrong throughout the year because you are effectively providing interest-free funding to the federal government. The money you receive from the IRS represents the money you overpaid during the tax year.
Instead of aiming for a tax refund each year, a better planning method would be to adjust your withholding rate to minimize the amount you pay on each paycheck. You will receive those funds that you would have otherwise received as a refund in your hands as you are paid.
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