Tax Refund Loans

If you cannot wait for your tax refund, then you can choose to find a lender that offers a tax refund loan.  These short-term loans use your federal income tax refund as collateral, and provide taxpayers with fast access to their refund dollars.

In this publication, we're going to discuss the topic of tax refund loans.  As part of that discussion, we'll talk about the process of applying for this type of loan.  Next, we'll discuss the pros and cons of tax refund loans.  Finally, we'll talk about some of the alternatives to this type of financing arrangement.

Loans Secured by Tax Refunds

Also known as state and federal refund anticipation checks, refund anticipation loans (RAL), and instant refund loans, these short-term loans are meant to offer consumers fast access to their tax refund dollars.  Instead of waiting weeks to receive their full refund from the IRS, these offerings provide customers with the convenience of receiving their money in the near term minus the associated fees and interest charges.

Generally, the process of obtaining a tax refund loan works something like this:

1. Tax Return Prepared - the filer's income tax return is prepared and the resulting calculation indicates the filer is entitled to a tax refund.
2. Loan Offered - while loans are offered over the Internet, most customers are provided the opportunity to obtain a loan through their tax preparer.  At this point, the borrower will be informed of the terms and conditions of the loan.
3. Loan Approval - once all the forms have been completed and the loan is secured by the tax refund, the borrower is usually approved for the loan by a banking institution that works with the tax preparer.
4. Authorization Form - a standard form is filled out, authorizing the IRS to deposit the borrower's tax refund directly into an account of the lender.
5. Money Received - once approved, the borrower can receive their refund (less fees and interest charges) "on the spot."  Payment may be received by check, direct deposit, or via prepaid debit cards.

Tax Refund Loan Fees

With a refund anticipation loan, the borrower receives only a portion of their refund.  Any fees owed the tax preparer and bank is first subtracted from the refund amount to derive the net dollar amount paid the borrower.

The fees associated with tax refund loans are considered high given the fact the money is paid back to the lender by a federal or state agency.  Borrowers can expect to pay tax preparation fees, administrative fees, loan fees, finance charges, as well as processing fees. 

A sampling of loan amounts and fees charged over the Internet results in the following table:

Note:  Annual Percentage Rate on these loans was calculated based on the assumption the time to receive the tax refund from the IRS could range from as little as 11 days (electronic filing and direct deposit) to as long as 7 weeks (filing by mail and check by mail).

Pros and Cons of Refund Anticipation Loans

The big advantage of RALs is the convenience of gaining immediate access to your tax refund dollars.  Unfortunately, the big disadvantage of these loans is the fact customers of these lenders pay a high price for this convenience.

According to statistics gather by the IRS and reported by the Consumer Federation of American, approximately $900 million in loan fees were paid by roughly 9 million taxpayers back in 2007.  Even more disturbing is that nearly two-thirds of borrowers were taxpayers eligible for the Earned Income Tax Credit, a benefit that is generally aimed at helping the working poor.

Alternatives to Tax Refund Loans

The perfect alternative to a tax refund loan is to eliminate the need to borrow money in the first place.  This can be achieved simply by waiting for the refund to be received directly from the IRS.  Some of the other options to tax refund loans include:

• IRS Refund Check - you can receive your refund via a mailed check.  If you mail your return to the IRS and request a check mailed back to your home, this cycle time can take a long as seven weeks.  Alternatively, you can file you return electronically and receive a check by mail in as little as three weeks.
• Direct Deposit - the most time-efficient way to receive your refund directly from the IRS is to file your income tax return electronically and receive your refund in the form of a direct deposit into your bank account.  The cycle time for this option ranges from eight to fifteen days.
• Household Budgets - another way to eliminate the need for immediate access to your tax refund is to create a household budget.  Doing so allows you to understand how money is spent by family members each month on both essential as well as discretionary items.
• Family Loans - always an alternative, but sometimes a humbling experience.  Borrowing money from a family member or friend is a good choice if you know you'll have the financial resources and willpower to pay back the loan when you receive your tax refund from the IRS.

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