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Tax season can be stressful, especially if you’re tight on cash and waiting for your tax refund. However, you may not have to wait after all. If you need money before your refund arrives, you may want to consider a tax refund loan.Tax refund loans essentially give you an advance on some of the money coming to you in your refund. However, there are some disadvantages to be aware of, including the fact that you may have to pay fees on a loan on a tax refund.Here’s what you need to know to determine if a tax refund loan is right for you.
Understanding Tax Refund Loans
Tax refund loans, also known as tax refund advance loans or refund advance loans, are short-term loans based on your tax refund. They are usually available December through February. These loans are offered through tax preparers and are typically easy to qualify for. While tax refund loans used to come with high interest rates, they are now generally interest-free. The amount you can get a tax refund loan for may range from a few hundred dollars to several thousand dollars. The loan amount will be deducted from your tax refund once the refund is issued.Here’s how a tax refund loan works: When you file your taxes, your tax preparer will determine if you’re owed a refund. If so, you’ll submit an application for a tax refund loan (many tax preparers work with banks that lend the funds). Generally, there are no specific credit score requirements that you need to meet. However, the bank may review your credit profile, a process known as a soft credit pull, which may not affect your credit score. If you’re approved for a loan for a tax refund, the funds are typically dispersed quickly — either onto a prepaid card, which might come with fees, or into your bank account.
Tax Refund Loan Fees
While many tax preparation services offer 0% APR on a tax refund loan, there may be other fees involved. To be eligible for a tax refund loan, you’ll need to use a tax preparer, which will cost you money. If you were planning to use a tax preparation service regardless, then you might consider this to be no additional cost. However, if you would’ve otherwise filed your return yourself, the tax preparation expense is an extra fee.In addition, interest-free tax refund loans may only be available in certain months. For example, if you file your taxes early, a loan might cost you more. A tax refund loan that has 0% APR in January may have 30% APR or higher a month earlier in December. Another thing to consider: If the tax preparer miscalculated how much of a refund you’re owed, and you end up getting less money than you think, you will need to repay the tax refund loan in full, which will cost you.Finally, if your loan is issued onto a prepaid card, the card may come with fees for using it. Be sure to ask about this — and also inquire about any other fees that might be associated with a tax refund loan.
Pros of a Tax Refund Loan
Tax refund loans have a number of advantages, including:
Quick access to funds
Loans are often interest-free
There’s typically no hard credit check
Don’t need a high credit score to qualify
Cons of a Tax Refund Loan
Tax refund loans also have some disadvantages, such as:
Potential interest or fees
Limited loan amounts
Need to pay a tax preparation fee
Miscalculation on your refund could cost you
Tax Refund Loans vs Personal Loans
Another option for borrowing money while waiting for your tax refund is to take out a personal loan. Here’s how tax refund loans and personal loans compare.
Tax Refund Loans
Personal Loans
Only available if you use a tax preparation service
Anyone can apply
Only available from December to January
Available all the time
The amount you can borrow is limited
Larger loan amounts available
Loan duration is short term
Loan duration is flexible
Interest rates may vary from 0% to 30% or higher
Moderate to high interest rates
Generally easy to qualify for
Typically stricter qualification requirements
Are Tax Refund Loans Available Online?
If you’re interested in getting a tax refund loan online, there are options for doing so. Some tax preparation services offer online tax refund advance loans. Check with the tax preparer you’re planning to work with to see if this is a service they offer, since not all of them do.
Tax Refund Loan Alternatives
There are other options besides tax refund loans to get the funds you need quickly. Here are two alternatives to consider:
Credit Cards
Using a credit card could help you cover expenses you need to pay for now. But keep in mind that many credit cards typically have high interest rates. Unless you can pay off the entire balance before the credit card billing cycle ends, you’ll pay interest on the money you owe. If you have strong credit, you may be able to qualify for a credit card with a 0% introductory APR. As long as you pay off the balance before the introductory period ends, you won’t owe any interest.
Personal Loans
Taking out a personal loan can also help you get the money you need. How a personal loan works is that a bank, online lender, or credit union lends you a lump sum that you repay with interest in installments over time. Personal loan uses are many — these loans are flexible and may be put toward almost any purpose, including paying for major purchases, covering medical bills, or financing home repairs. Personal loans usually have lower interest rates than credit cards. And unsecured personal loans don’t require you to put up any collateral, such as your car or house, to guarantee them. Another one of the reasons to apply for a personal loan is that it could offer fast funding. After you’re approved for a personal loan, you may expect to receive funds quickly, typically within one to five days. And personal loans are generally available in amounts ranging from $1,000 to $50,000, so the personal loan amount you may qualify for might be higher than the amount you could access with a tax refund loan.
The Takeaway
Tax refund loans, also known as tax refund advance loans, allow you to get a portion of your tax refund in advance through a short-term loan. These loans are offered by some tax preparers for a limited time — generally December through February. While many tax refund loans have a 0% APR, there may be fees associated with them. If you need funds quickly, there are other options you can explore that may be more flexible, such as taking out a personal loan. Consider all your financing options to choose the one that’s best suited to your needs.
3 Personal Loan Tips
Shopping around helps ensure that you’re getting the best deal you can. Lantern by SoFi makes this easy. With one online application, you can find and compare personal loan offers from multiple lenders.
If the interest rates you’re being offered seem too high, try lowering the loan amount. Generally, the larger the loan, the greater the risk for lenders, who likely charge a higher interest rate for the increased risk level.
Read lender reviews before taking out a personal loan. You’ll get a sense of how long it can take to receive the funds and how good the customer service is.
Frequently Asked Questions
What are tax refund loans?
Can you get a tax refund loan online?
What are tax refund loan alternatives?
Photo credit: iStock/alfexe
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About the Author
Matthew Warholak
Matt Warholak is a US-based financial writer and personal finance specialist with 7+ years in video, podcasts, and online content. His work has appeared on websites including BlockFi, iGrad, iTrust Capital, BlockWorks, Market Disruptors, CryptoEQ, and more. Matt has a degree from SUNY Plattsburgh.
