There is any number of possible reasons why a U.S. taxpayer may want or need to receive an expected tax refund early. And there likely are an equal number of ways for those taxpayers to get their money early. Here are some issues to consider, along with where to go and what to watch out for.
First, a tax refund loan is still a loan, and as with all loans, you will pay for the privilege of using someone else’s money, even for a short time. That’s true even if the refund advance loan carries a 0% interest rate.
Second, most advance loans are short term, typically just two or three weeks. Taxpayers who claim the earned income tax credit (EITC) or the additional child tax credit (ACTC) are most likely to seek these loans and to be among early tax return filers. The catch is that federal law does not allow people claiming either of these credits to receive their refunds until a specified date. This year, refunds won’t appear until at least February 27.
Third, borrowers may only borrow an amount less than or equal to their expected federal tax refund. If the advance against the refund is calculated by a tax preparation firm, this should be no problem. But if taxpayers prepare their own returns and receive an advance from a bank that is larger than the refund, those taxpayers end up paying out of pocket for the difference. Because the need for the money was immediate, a taxpayer’s new problem is where the money will come from to pay back the too-large loan.
Advance loans are available from many banks and tax preparation firms, among other lenders. Tax prep firms may offer 0% interest for the loan but will charge a fee for preparing and filing your tax return. There is also a minimum expected refund requirement.
For taxpayers considering an advance loan this year, time is running out to get one from a tax preparation firm. According to NerdWallet, the deadline for an advance from Jackson Hewitt is February 24, while H&R Block offers the loans until February 28. Intuit TurboTax’s deadline was February 15. Bank deadlines may vary more widely. The fact is that if a person needs an advance loan, that need is typically immediate, so extending the programs beyond the end of February may be pointless from a bank’s point of view.
Tax preparation fees at H&R Block start at $59 and vary depending on the complexity of the return. Jackson Hewitt declined to disclose its fee schedule to NerdWallet, and TurboTax fees vary from free to around $90. If, for example, a taxpayer expects a refund of around $2,800 (the average amount in 2018), a $60 fee is equal to about 2.1% of a three-week loan. Extended to an annual percentage rate (APR), borrowing that money actually costs 37%, well above even credit-card APRs. For a smaller loan, the APR is even greater.
NerdWallet has suggested three alternatives to refund advance loans. Credit unions may offer members payday alternative loans that have a maximum APR of around 28% with an application fee of no more than $20.
Personal loans from online lenders are another choice. APRs range from around 6% to 36%, and the loans can be available for use as quickly as the same day they are approved.
A third choice is a promotional 0% APR credit card for consumers with good credit. As long as the loan is repaid within the promotional period, borrowers pay no interest.
Another option — at least for next tax season — is to change the tax withheld from paychecks. Getting a refund is nice, but taxpayers who do that are lending the federal government money at no interest. Ask yourself, who needs the money more, you or the federal government?