There’s nothing like the feeling of getting a big tax refund; but that doesn’t mean you have to take out a loan to get your money sooner.
Filing your taxes as soon as possible is good practice — the IRS will start accepting returns on January 24, 2023 — but asking for an advance on your expected tax refund can be a costly decision.
A tax refund advance is a type of loan who offers you part of your expected tax refund amount weeks or months before your actual refund. The premise might sound compelling, especially if you’re still knee-deep in holiday shopping. With inflation making everything more expensive this holiday season, having extra cash on hand might help, but a high-interest tax refund advance isn’t usually the way to go.
“Many companies will advertise 0% APR loans, but in reality they charge a fee to compensate for this, including the tax preparation fee they charge for filing the return in the first place,” RJ said. Weiss, a Certified Financial Planner. and founder of The Ways to Wealth website.
What is a tax refund advance and does it make sense for your financial situation? We’ll explain everything you need to know about this unique loan below.
What is a tax refund advance?
A tax refund advance is a short term loan which uses your anticipated tax return as collateral. You can usually borrow between $200 and $4,000 between December and February.
Interest on this type of loan is generally higher than most other loans, with annual percentage rates rising to around 35%. For context, average credit card APRs are about 18%, while personal loan APRs are around 11.08%. Some tax filing services don’t charge interest for this service as long as you agree to file your tax returns with them, but this may mean that you end up paying a fee to file your tax returns.
“It’s not a standardized product.” Weiss said. “As a result, fees, requirements, and APRs vary widely from company to company.” If you’re considering a tax refund advance, Weiss recommends reading the fine print and comparing different options.
How do tax refund advances work?
You will apply for a tax refund advance on a tax preparation company’s website. You may need to provide proof of income, your W-2 (if available), and other financial documents.
Tax refund advance loans generally don’t have the same credit score requirements as other loans, and the amount you’re approved for may depend on the amount of repayment expected. So even if a service advertises advances of $3,000, it does not mean that you will be eligible to receive that full amount.
You’ll receive your funds within a few business days, although some services offer same-day or next-day access to your money. If you are required to file your taxes with a tax preparation company, the amount owing may be automatically deducted from your refund. Otherwise, you will have to repay your loan on the agreed due date.
What are the risks of taking out a tax refund advance loan?
There are several reasons why you should be wary of tax refund advance loans.
Since these loans are based on an expected repayment, there’s always the chance that you won’t receive a repayment when you file your taxes in 2023 – or that your repayment will be lower than expected. If this happens, you are responsible for repaying the loan in full (or the amount your repayment does not cover) out of your own pocket.
Second, a cash advance is rarely free, even if it’s advertised as 0% APR, Weiss said. There may be hidden charges, including requiring you to pay for tax filing services, which can be costly. Additionally, some services charge high interest rates, making them a more expensive loan option.
Who offers tax refund advances?
Many leading tax filing companies offer advances on your tax refund. Although it’s still fairly early in tax season, Jackson Hewitt and H&R Block are currently offering a form of tax refund advance.
Jackson Hewitt offers two prepayment loans: a prepayment option and a no-fee repayment option. The prepayment option lets you receive up to $1,000 in December and up to $3,500 in January, but has finance charges and a high APR of 34.22%. The no-fee prepayment loan offers up to $3,500 and has a 0% APR, but isn’t available until January. You will need to file your taxes with Jackson Hewitt for both loans.
H&R Block offers Emerald Advance®, which is a bit different. This is a line of credit of up to $1,000 by January 7. You don’t have to file your taxes with H&R Block to apply, but if you do, you can use your refund to pay off your line of credit.
To note: Beware of payday lenders who may advertise similar loans during this time of year, as these companies often have extraordinarily high interest rates and fees. In some states, payday loan rates can average 391% to 521%. Personal finance experts recommend avoiding payday loans at all costs.
What are good alternatives to advance tax refund loans?
Waiting for your refund to arrive in 2023 is your best option. Even a simple miscalculation could cause you to expect a higher repayment and accidentally borrow more money than you can afford to repay when your repayment hits your account.
If an emergency expense arises, such as an essential medical bill, car repair, or other necessity, there are better borrowing options available. Weiss recommends a Personal loan if you need quick financing, which will often have better terms and a lower interest rate than a tax refund advance.
You might also consider a credit card last resort. Just make sure you can repay the balance in full within 30 days to avoid interest, late fees, and other penalties.
For more tax advice, check out our story on the main tax changes that could affect your refund next year, and find out all the owner credits and deductions you may be able to claim.
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