What is a Tax Refund Loan?

A tax refund loan is becoming a popular way to get access to your income tax refund sooner. They have been around in some form since the 1980's, but more recently have become a much more commercial endeavor. Tax specialists advertise these Refund Anticipation Loans frequently and around tax season you are bombarded with promotions. So what exactly is a tax refund loan and how do they work? Here are the basics behind a Refund Anticipation Loan.

How They Work

A tax refund loan is a fairly simple concept to understand. You start out by going to a certified tax professional to file your taxes for you. They prepare your taxes for you and file them electronically. They will be able to tell you immediately what your refund will be. Once they determine your refund amount, they will present you with a few different options. You can have your money directly deposited into your bank account from the government. You could wait on a paper check from the government. Or you can have your money now from the tax preparer in return for paying a few fees. Those that choose the immediate payment are accepting a Refund Anticipation Loan. You pay a percentage of interest and usually some sort of fee in order to get the money. Then when the refund comes in, it goes directly to the tax professional instead of you to pay them back. 

Fees and Interest

The amount of money that you will pay for this type of loan can be staggering. In some cases, the interest works out to 250% APR. Since it is for such a short time period, it doesn't seem like that much money. However, compounded out over the year it really adds up. You will also usually pay some kind of electronic filing fee and a loan fee. When you add that to the fee for preparing your taxes and any of the mistake-free guarantees that they have, you will be spending a huge chunk of your refund before you even get it. In order to use this type of loan, you have to really need the money immediately. If you can wait for a week or two, it is by far in your best interest to wait.

Controversy

There has been a lot of controversy around this loan practice since the beginning. There have been lawsuits filed against tax preparation companies for their outlandish interest rates and other factors. Many of these companies have been scolded for their practices of marketing to those that can not afford these fees. Many times, the tax professionals paint an unrealistic picture of how long it may take to get the return back, thus encouraging people to accept the loan. Many times, people don't really need the money immediately, but are talked into the loans. The IRS is doing what they can to eliminate the need for these loans by integrating their CADE system into the marketplace. This system allows tax payers nearly instant access to their refunds. Within two to three days, the IRS will have the refund issued and directly deposited into taxpayers accounts.