Why Tax Refund Anticipation Loans Are A Bad Deal

January 17, 2018

It might sound like a great deal to get your hands on your refund money today versus waiting until you’ve not only filed your taxes, but the IRS has issued the check, but it’s a bad deal all around. The storefront tax preparation companies that offer these deals are no longer allowed to charge the outrageous interest rates of prior years, but they still make a great deal of money off of these by charging fees that, when added up, can total a significant portion of your refund.

Back when we all mailed our returns in and had to wait for the IRS to send us a check, sometimes months later, these loans maybe made more sense for people. These days though, they are really just a way to make money off of less-informed people, which is what really gets my goat.

Rather than using a refund anticipation loan charged by a preparer, try one of these options:

• File online for yourself. If you make less than $66,000, you qualify for free online filing and should take advantage rather than paying a storefront to do it for you. Planning point: if you qualify for the Earned Income Credit, the IRS is required to hold your refund until mid-February. This is not a reason to take out a loan though — just don’t count on that money yet!
• Have your refund direct deposited. Rather than waiting for a check to come in the mail then having to take it to the bank, have the IRS deposit the money straight into your bank account. This will really speed up your refund – the IRS says that most people should have their direct deposit within 3 weeks or less of filing. Plus, no more worrying about your check being stolen or lost.
• Consider same as cash deals, with caution. If you’re planning to use your refund to make a big purchase such as an appliance or furniture, check to see if the store is offering any type of “same as cash” deal, where you have a certain period of time to make payments interest free, usually 90 days or more. The key to this working is that you actually pay the store credit off with your refund before the interest-free period expires. Otherwise, it can be just as bad of a deal as a refund anticipation loan.

The bottom line is that paying any type of fee or interest to a bank or business in order to get part of your tax refund early is almost always a bad deal. Before you sign up for one, make sure you fully understand what it’s costing you and consider waiting to just get the money from the IRS if at all possible.

 

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