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Should You Use A Tax Refund Loan?

Miranda Crace6-minute read
PUBLISHED: February 02, 2023


Filing your yearly tax return can be time-consuming, but getting a tax refund can make it well worth the effort. In fact, if you have big plans for your refund money and are in a hurry to receive it, you might consider pursuing a tax refund loan as an advance payment. However, this option has some downsides, including some fees and a high annual percentage rate (APR).

Let’s take a closer look at tax refund loans, how they work, and the pros and cons of using one.

What Is A Tax Refund Loan?

A tax refund loan – also sometimes called a refund advance loan or refund anticipation loan – is a short-term advance on your tax refund. Most of these loans are between $200 and $4,000, but how big of a loan you can get will depend on your expected tax refund amount as determined by your tax preparer. It’s also important to note that a tax preparer will typically only allow to borrow a percentage of the full tax refund amount, just in case the IRS finds an issue with your tax return and doesn’t approve the refund amount you’re expecting.

Taxpayers must file their tax return to even be considered for this type of financing, and your tax preparer must determine that you are due a refund for the previous year’s taxes. If you owe taxes instead, you won’t be eligible for a tax refund loan. So, if you want a tax refund loan, you’ll need to have all the information and forms – such as W-2s or 1099s – required to file your annual income tax return.

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Where Can You Get An Advance Loan On Your Tax Refund?

Refund advances are typically offered by tax preparers or tax-filing companies. You may see payday lenders offering similar services, too, but they’ll likely be much more expensive.

For instance, Jackson Hewitt offers an early tax refund loan with an APR of 34.22%, while payday loans have an average APR of 391%. As you can see, a borrower would pay significantly more interest with a payday loan.

Most tax preparation companies offer tax refund advances as an additional service that’s available between December and February.

How Does A Tax Refund Advance Loan Work?

A tax refund loan works like a payday advance, except you’ll use your tax refund as collateral instead of your paycheck. When you’re ready to file your return, your preparer will set up a temporary bank account for the Internal Revenue Service (IRS) to deposit your refund into.

With your anticipated refund total in mind, your tax preparation service – now your lender – will approve you for a certain loan amount. Your tax preparer will give you the funds as a check, a prepaid debit card, or a direct deposit into your personal bank account.

Once the lender receives your tax refund from the IRS, your lender will disperse the funds to you – minus your tax refund loan amount and any fees and service costs associated with the loan. The temporary bank account is closed, and your loan will be repaid in full.

How To Get A Tax Refund Advance

Getting a tax refund advance is fairly straightforward, even though it doesn’t work like a traditional installment loan. Most notably, you don’t need to get prequalified ahead of time, and you won’t have to make monthly payments afterward.

Once you’ve found a tax preparer that offers a tax refund advance, it’s best to find a few other preparers that offer this service, so you can compare them and choose the one with the lowest APR. Just keep in mind: Not all companies advertise their interest rates or fees.

Once you’ve settled on a tax preparation service, are ready to file your tax return and have been approved for a refund advance, your tax preparer will set up the aforementioned temporary bank account and disperse the funds from the tax refund loan using your desired method of payment.

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The Pros And Cons Of Getting A Tax Refund Loan

As with any type of financing, a refund anticipation loan comes with certain risks and benefits. Here’s a quick summary of both, followed by a slightly more in-depth look, to help you better assess whether this type of loan could work for you.

Tax Refund Loan Pros

Tax Refund Loan Cons

Fast money

Tax preparer needed

No monthly payments

High interest rates

No bank account needed

Possible lump-sum payment if your refund is smaller than expected

Easy qualification requirements

The possibility of refund loan scams

Pros Of Refund Anticipation Loans

Perks of a tax refund loan are as follows:

  • You can get your money quickly. Most refund advances have a quick turnaround time. Lenders could make funds available within a few business days.
  • You won’t have monthly installments. Since the lender will be repaid once your refund is deposited, you won’t have to make monthly payments.
  • You don’t need a bank account. If you don’t have a bank account, your lender can give you a prepaid card or check instead of a direct deposit.
  • You don’t need to meet strict eligibility requirements. Refund advances don’t carry the same requirements as most loans. So if you have poor credit, this option could be ideal.

Cons Of Refund Advance Loans

Now for the downsides of refund advance loans:

  • You have to use a tax preparer. Since your tax preparer will also be your lender, you’ll have to hire someone to file your tax return.
  • You’ll have a high interest rate. A refund advance typically means paying tax preparation fees and a high interest rate, although the interest rate will likely be low compared to what you’d find with a payday lender.
  • You might have to pay more if your refund is smaller than expected. If your anticipated refund amount is incorrect, you might have to make a lump-sum payment to your lender to pay off the rest of your loan. However, you can typically avoid this if your tax refund loan is only a modest percentage of your anticipated tax refund, because you’ve allowed for some wiggle room in the event that your actual refund is less than expected.
  • You’ll need to watch out for tax refund loan scams. Many scammers use promises of maximizing your refund or advance as a way to entice you into using their services. Be sure to work with a reputable tax preparer if you anticipate requesting a refund advance.

Tax Refund Loan Alternatives

If you can’t wait for tax season to take out a loan, you’re in luck. A tax refund loan is just one of several options that you might consider. Let’s learn about these tax refund loan alternatives next.

Personal Loans

Personal loans can be used for a variety of reasons and usually have repayment terms of 12 – 60 months. Interest rates on secured personal loans are often substantially lower than the rates on payday loans and credit cards, typically making a secured personal loan a more affordable option. However, most lenders of unsecured personal loans impose fairly strict income and credit score requirements, so if you have too high of a debt-to-income ratio (DTI) or poor credit, you might have a hard time getting approved.

0% APR Credit Card

If you’re looking to consolidate debt, a 0% APR card can be a good option. Sometimes used for a balance transfer, this type of credit card comes with a promotional APR that lasts a short period of time, making it easier to pay off debt. You’ll just need to make sure to pay off the outstanding balance before the 0% APR period expires.

Cash Advance

You can use a credit card you already have to get a cash advance, which is a short-term loan borrowed against your card’s credit limit. While this option can work in an emergency situation, the APR is usually higher than your standard rate. To see what fees apply, it’s best to check with your credit card provider before taking out a cash advance.

Personal Line Of Credit

Similar to a credit card, a personal line of credit allows you to borrow funds from a credit line while making payments. This type of financing typically lasts a number of years and can be borrowed from and repaid multiple times. Like an unsecured personal loan, a personal line of credit typically comes with strict eligibility requirements.

Final Thoughts

Knowing that a tax refund is coming your way can be exciting, and you may be tempted to use an advance to gain access to some of your money sooner. However, tax refund loans aren’t a great fit for everyone, and you won’t even be eligible for a tax refund loan unless your tax preparer determines that the government owes you a refund. If you’re considering this option when filing your yearly return, take the time to fully understand the pros and cons.

If you decide the risks are too many and want to use a personal loan instead, you can get the prequalification process started today with Rocket LoansSM.

Save Time With Our Efficent Loan Options.

Rocket LoansSM keeps it simple with a single, fixed monthly payment.

Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years.