What Is a Tax Refund Advance?

FT Contributor
Four $100 bills sits fanned out on top of a 1040 tax form.
Reading Time: 5 minutes

For many people, the only enjoyable part of filing taxes is getting a tax refund. That makes sense, considering that the IRS reports the average tax refund in 2019 was about $2,800. But when you need the cash to catch up on bills or want to make a big purchase, waiting several weeks for your return to be processed and the refund to be issued can feel like an eternity.

That’s where tax refund advance loans come in. Also referred to as “instant refunds,” “tax refund advances,” “refund advances,” or “tax refund emergency loans,” a tax refund advance loan is a short-term loan against the expected amount of your tax refund. You’re essentially borrowing your own money, and repaying it when your tax return is processed and you receive your refund. Although a tax refund advance can give you access to at least some of your expected refund within a day or so, you need to understand exactly how the process works, and some of the pros and cons to determine whether it’s the right option for your situation.

Using Tax Refund Cash Advances as Emergency Loans

Generally speaking, tax refund cash advances are best reserved for times when you need immediate access to funds for emergencies. A tax cash advance is in fact a loan, and by taking the money, you’re taking on debt even though you’re borrowing against money that’s technically yours. Tax refund cash advances are loans backed by banks, using your expected tax refund as a guarantee. Because this is the case, it’s also possible that the bank will run a hard inquiry on your credit before issuing the loan, which can affect your credit score. It’s unlikely that you will default on the loan, though, as it is repaid directly to the lender from the IRS via direct deposit to a designated bank account. Any remaining refund is repaid to you from the tax preparation company.

If you work with a tax preparation company, such as H&R Block or Jackson Hewitt, you can typically secure a tax cash advance of a portion of your expected refund for low or no additional costs. You’ll need to pay for the professional tax preparation services themselves, but the companies offer the refund advances as an enticement to use their services. Although most tax preparation firms do not charge fees or interest on the loans, there can still be costs involved. For instance, some companies put their loan payments on prepaid debit cards, which may charge transactional or monthly fees. Additionally, some tax advance loans do charge interest. Because these are short-term loans (on average, they are repaid in 12 days), the interest charges typically aren’t exorbitant, but they can still take a bite out of your total refund.

It’s also possible to get a tax refund cash advance from other companies that don’t prepare your taxes, but often the fees and interest are much higher. Ultimately, it’s best to reserve tax return advances for true financial emergencies. Thanks to electronic tax filing options, tax returns and refunds are being processed faster than ever, with the IRS reporting that most people receive their refunds in less than 21 days. Even if the only fees you pay are associated with the prepaid debit card, you are still reducing your overall refund and potentially affecting your credit by taking one of these loans.

How Do You Get a Tax Advance Loan?

Most major tax preparation companies offer some form of tax refund cash advance program, although the details and charges vary. Among the companies providing advances include:

Every company has its own policies regarding tax refund advance loans, but there are some similarities. All companies require minimum refunds (ranging anywhere from $300 to $1000 or more) and offer refunds in set amounts that depend on your total return amount. For instance, H & R Block offers refund advances of $500, $750, $1,250, and $3,000. You can only take a loan for less than the expected refund amount. Some companies also have limits on when you can apply, only allowing customers who file using their tax preparation service before the end of February to apply for an advance loan.

Be cautious about companies that offer loans based only on your W2 instead of your completed tax return. You may be able to secure a loan based on your estimated tax return, but unless you know exactly how much money you’re getting back, you could be borrowing more than you can afford. These loans may also come with high fees, interest charges, and other unfavorable terms.

What Is a Refund Anticipation Loan (RAL)?

As you consider your options for getting your tax refund more quickly, you may see programs referred to as refund anticipation loans, or RALs. In their current incarnation, RALs are the same thing as a tax refund advance. However, this hasn’t always been the case. Prior to 2012, taxpayers could apply for RALs equal to the entire amount of their anticipated tax refund, and paid high-interest rates and fees on the advances. Regulatory changes in 2012 all but eliminated this type of RAL, leading to the current offerings of partial advances and lower fees. Essentially, tax preparation companies have decided to absorb the costs of these loans as a marketing tactic, bringing in customers to have their taxes done who might otherwise have filed returns on their own.

How Does the Refund Anticipation Advance Work?

When you request a refund anticipation cash advance, the payment does not come from the tax preparation company, but is a loan from a third-party bank. Therefore, you typically must apply for the advance through the tax preparer; some companies, like H&R Block, let you prequalify online before your tax preparation appointment. The lender will run a credit check to determine your creditworthiness and whether the loan can be made.

After your taxes have been prepared, you can borrow a portion of the anticipated refund up to specific limits set by the company and the lender. The money is transferred to you via direct deposit or a prepaid debit card, usually within 24 hours. Some companies will not issue the loan until the tax return is accepted by the IRS. Once you have the money, it’s yours to use how you see fit.

Tax refund loans are repaid directly to the lender by the IRS. Your refund is issued to a designated bank account in your name, and the tax prep company will send you the remaining amount of the refund. Once the loan is repaid and the refund issued, the bank account is closed.

Are There Any Alternatives for Loans?

Ultimately, unless you need your tax refund for an immediate emergency, it’s best to wait until the money arrives. Again, most refunds are processed within three weeks, usually less if you file electronically and use direct deposit. Being patient ensures you keep all of your refund and don’t have to pay any extra fees or interest. In addition, you have to consider the tax preparation fees you’ll have to pay in order to access a tax advance refund in the first place. If you have a simple return, you can usually use form 1040EZ and file your taxes yourself, saving the fees you’d pay a professional tax preparer. If you do need help filing your taxes, programs like the IRS’ Volunteer Income Tax Assistance and Tax Counseling for the Elderly may be able to help.

There are other alternatives for accessing quick cash for a financial emergency, such as payday loans, credit cards, or personal loans, but they tend to come with high fees and interest. If you determine that a refund advance loan will get you out of your short-term financial crisis, ask questions, understand all of the fees and charges upfront, and don’t succumb to any high-pressure sales tactics that will cost you money.

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