For some people, tax refunds can be a nice addition to a bank account each year. However, if you have a list of urgent bills , overdue debts, or large purchases, your tax refund might be more of a financial necessity than padding for your savings account.
Once you file your taxes, refunds can take weeks to be processed and dispersed. So, if you need it as soon as possible, it can be tempting to find a way to get your money faster.
Some people look for tax refund anticipation loans to get an advance on their refund. While taking one out may get you access to your money sooner, it’s important to read the fine print.
What is a Tax Refund Anticipation Loan?
A refund anticipation loan (RAL) is a short-term loan that’s issued by a third-party lender based on a taxpayer’s expected refund for that year. The lender will give you an advance for the money that you’re expected to receive from your tax refund without any applicable interest and fees. Once the IRS prepares your official refund, the money goes straight to the lender to repay the loan.
It sounds too good to be true. Beware: if your official tax refund is less than what you borrowed, you may be on the hook for the difference. Fees will add up on processing your refund as well as your refund anticipation loan, resulting in many hidden costs. If you were already in dire need of the additional funds, before you know it you may be in need of more or begin deferring other payments .
Refund Anticipation Loans vs. Refund Anticipation Checks
Today, tax refund anticipation loans have a slightly different name. Following a regulatory crackdown prior to the 2013 tax season, RALs have been mostly replaced by refund anticipation checks (RACs). However, they’re still available from private lenders.
Refund anticipation checks are similar to RALs and are often seen as interchangeable. Unlike the loans offered by private lending companies, these checks are generally offered by companies that offer tax preparation services. These checks are less risky than RALs, do not accrue interest, and are offered as part of their package for the service of preparing your taxes.
RALs and RACs are most appealing to people who want or need their tax refund money as soon as possible. As you may expect, they’ve earned a reputation for inflated fees and rates that take advantage of the people who need their refund dollars the most.
How Refund Anticipation Checks are Processed
When the IRS issues your official refund, it is deposited into a temporary account that is used to pay the tax preparer. Although you are not subjected to high interest rates, you may still see fees for tax services.
Who Offers Tax Refund Anticipation Loans Online?
Companies providing RALs are typically eager to offer them to any qualifying customer. Low-income and moderate-income taxpayers may have a harder time saying no, even if they want to avoid interest and fees if they see a loan as their best option to access tax refund funds they need right away. Before you resort to a loan that disadvantages you, try these options to get your tax refund as soon as possible, without involving lenders:
Refund Anticipation Loan Alternatives
It may be worth looking into other tax refund options before you make a decision. If you need to make ends meet, here are a few ways to get your refund quickly without involving lenders: