After the government declared in 2012 that refund anticipation loans by banks violated federal lending regulations, tax preparation services and other lenders have created new ways to obtain a short-term loan or line of credit. The National Consumer Law Center discourages individuals from taking these loans because of their high fees and interest rates. With electronic filing and direct deposit, you might have to wait only 10 to 14 days to receive your refund from the IRS, and there might be more creative alternatives that don't require you to pay excessive fees.
Refund Anticipation Loans
Many tax preparers used to offer refund anticipation loans. The preparer partnered with a bank to lend the taxpayer a certain amount of money based on the calculated refund, usually on the day it filed the taxes. When the preparer received the refund, it paid off the loan and distributed any remainder to the taxpayer. The government determined that RALs violated federal lending regulations and took action to stop the practice. The IRS also changed its policy and refused to tell tax preparers whether a filer's refund would be used to pay an outstanding tax lien. No tax preparers offered these loans after 2013.
Payday Loans Marketed as Tax Refund Loans
Some lending brokers and lenders offer loans that might be called an income tax advance, tax refund loan, tax anticipation loan, tax refund advance or installment loan, or refund anticipation loan. While they purport to be tied to your income tax refund, they are really short-term payday loans with a high interest rate. You typically must qualify for the loan based on your income, not your tax refund, and you must have your paycheck sent to your bank account using direct deposit. You must authorize the lender to automatically deduct the amount of your loan payment on the day your paycheck is deposited into your bank account.
Tax Preparer Loans and Lines of Credit
The National Consumer Law Center reported that, in 2013, Liberty Tax Services offered refund loans for qualifying filers and that Jackson Hewitt offered a line of credit for qualifying filers. The loans and lines of credit were arranged through non-bank financial institutions. According to NCLC, a $2,000 loan through Liberty for 15 days might cost $49.90 plus 36 percent interest, the equivalent of a 97 percent interest rate. A Jackson Hewitt line of credit required a monthly maintenance fee, a fee for accessing the line of credit and a 35 percent interest rate. Having the line of credit for two months and drawing $500 might result in fees that are the equivalent of a 95 percent interest rate.
Selling Your Refund
Some lenders, such as AIT Financial Group, might buy your refund for a fee. For example, if you're expecting a $700 refund, AIT might buy your refund for $600. If you're expecting $1,500 to $1,600, AIT might give you $1,250. According to NCLC, the equivalent interest rate you're paying to sell your refund based on an estimated 21 days to receive your refund from the IRS ranges from 400 percent to 723 percent.
Rather than paying an extremely high interest rate for a loan of your expected tax refund, Bankrate suggests some alternatives. First, if you file electronically and use direct deposit, you can expect to have your refund in 10 to 14 days. If you plan to use the money to purchase something, such as an appliance, you might be able to obtain a store credit card to purchase the appliance and receive your refund before you receive the first credit card bill. Even if you have to make one interest payment, the interest rate will be substantially less than a refund loan or line of credit.