You've gathered all your documentation and filed your income taxes on time. All that's left is the wait for your tax refund. In recent years, that wait has been longer than usual, prompting many taxpayers to consider taking advantage of tax advance loans, but that's not always the best idea.
What Are Refund Advance Loans?
Once you file your tax return, the IRS takes some time to process it. That time can vary depending on when and how you file, but this year, the IRS estimates that refunds for electronic filers with direct deposit set up will be issued within 21 days. Paper return filers will typically have to wait four to six weeks.
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Tax refund advance loans came along as a solution to that problem. Many major tax preparation companies now offer these loans for a fee. You can request a tax refund advance if you file with H&R Block, TurboTax or Jackson Hewitt, among others.
Getting Refund Advance Loans
The best thing about income tax refund advance loans is just how easy they are to get. Typically, personal loans require qualification, which means you'll need a solid credit score and a minimum income and employment history. Lenders want to make sure you'll be able to repay the loan amount, with interest, in the timeline outlined in the agreement.
With a refund anticipation loan, the qualifications aren't as strict. The lender is guaranteed repayment once the IRS processes your return and issues your refund amount, so there's no need to check your credit history. This means even if you have bad credit, you'll likely qualify for an advance on your tax refund.
Qualifications for Refund Loans
The qualifications for a tax refund loan vary from one service to another, but the biggest requirement is usually that you file your taxes through that service. You'll opt into the advance when you file your taxes and sign all the necessary documentation. When your refund is issued, the tax preparation service will take the loan amount, and you'll get the rest.
But that doesn't mean you're free from all qualification requirements. Jackson Hewitt will look for any outstanding tax liens, as well as your history of IRS payments. With all tax preparation services, your refund amount will also come into play.
Loan Amounts and Minimums
If you're looking for a quick cash infusion to your bank account, a tax refund loan could be a great solution. That's exactly what these loans are meant to do. The loan amounts typically range in the low hundreds to a few thousand dollars or so, depending on the service. You'll also have to borrow a minimum amount to qualify.
For example, TurboTax's payday loans are issued in amounts of $250, $500, $750, $1,000, $1,500, $2,000, $2,500, $3,000, $3,500 and $4,000. The amount you're loaned is a percentage of your refund amount, though. In TurboTax's case, you can only take a loan of $250 on refunds of $500 to $999. To get the highest amount, $4,000, you'll need a refund amount of $8,000 or more.
Consider also: Freebies from the IRS
Cost of Tax Advance Loans
Services that issue tax advances alongside payday loans will likely charge you exorbitant interest rates to access your tax refund early. Interest rates and additional fees vary by lender, so it's important to carefully scrutinize the fine print before you agree. But if you go through a tax preparation service, you may be able to skip interest.
H&R Block, Jackson Hewitt and TurboTax charge no fees and no interest for these short-term loans. You do have to use their tax preparation services, though, so if you'd normally use a free service like IRS Free File, factor in the cost of tax preparation into your decision. Unless you know what your refund will be, it can be a guessing game as to the loan amount you'll receive, so you might find you're paying for tax preparation services, only to be disappointed in the amount you can access now.
A tax refund advance loan can let you access some of your refund now, with no penalties or interest. But you'll only be able to borrow a percentage of the total amount, and there will always be at least a few qualification requirements. If you already use a tax preparation service that offers these loans, it can't hurt to check into them. Otherwise, balance the fees you'll pay in preparation fees against what you normally spend to file and decide if it's worth it.
Consider also: When to Consult With a Tax Professional
- IRS.gov: 2022 Tax Filing Season Begins Jan. 24; IRS Outlines Refund Timing and What To Expect in Advance of April 18 Tax Deadline
- IRS.gov: Tax Season Refund Frequently Asked Questions
- Consumer Reports: Payday Loan Alternatives Becoming More Widely Available
- Intuit TurboTax: Refund Advance
- Jackson Hewitt: Refund Advance