How do I get one?
Tax refunds loans, alternatively known as instant refund loans or refund anticipation loans, are offered through tax preparation companies. When you go to file your taxes at your local H&R Block or Jackson Hewitt you might see advertisements for these loans, or your preparer might ask if you are interested. In order to get a tax refund loan through any particular preparer, you must have your taxes prepared there. If you decide to take up this offer, then you will receive a loan in the amount of your anticipated refund (generally up to $5000) in as little as one or two days.
How does it work?
While tax preparation companies offer the refund loans, the loans themselves are bank loans that come from third party financial institutions that partner with the preparers. In other words, the tax preparer is not the lender, though it might seem that way. Often the partner banks are out-of-state, federally chartered banks, which essentially means that they need not adhere to state law and can charge what they wish, but more on that later.
After the loan is dispersed to you, it becomes repaid with little work on your part. Your lender will set up a special account into which your refund will be paid, so you never even see it.
Pros and Cons
Tax refund loans are incredibly expensive for consumers, and therefore very lucrative for both lenders and tax preparation companies. Calculated as an APR, tax refund loan costs can be as high as 200 to 2000 percent!
Upon signing up for a tax refund loan, you will be charged a sign up fee of about $30 to $90 and a large financing fee. As mentioned above, you also will have to have your taxes prepared at the locale that offers the loan, and preparation fees and filing fees are not cheap either. Out of all of the money made, the preparation companies usually make about half, so be aware that a preparer might try to talk you into a tax refund loan. If you do not want one, then do not allow yourself to be coaxed into it.
Tax refund loans have been the target of a lot of criticism; after all, it only makes sense that it generally would be low income individuals who need the immediate money from their refunds. In a fairly short period of time then, a large amount of money is taken away from consumers who really need it and is given to tax preparation companies and banks.
Of course, if consumers never benefited from such loans then they would not exist. The bottom line is that if people need the cash, then the loans offer that service to them. In fact, it even has been suggested that while consumer groups traditionally have been against tax refund loans, consumers themselves like them.
In short, there is no doubt that tax refund loans are expensive for consumers and profitable for banks, but if you need they money, then you need the money.
If you are thinking about obtaining a tax refund loan, consider just how immediate is your need for the cash. The time difference between getting your money through a loan and simply waiting for your refund to go through is actually only about two or three weeks. If you can wait, then do. If you cannot, then you might want to consider borrowing money from a friend or family member in the time being.
In addition, you can try to speed up the processing of your refund disbursal by filing online instead of on paper. If you do this, and if you request that your refund be deposited directly in a bank account, then you may receive your refund in as little as ten days without having to forfeit some of your money through a tax refund loan.