Are you looking for a tax refund loan? Probably not worth it, experts say

Last minute archivists are working to send their returns to Internal Revenue Service until the tax year 2021 deadline Monday, April 18th – and are probably looking forward to a heavy check through tax refund.

Some tax companies or other lenders may offer the option of accessing these funds earlier, in the form of tax refund loanalso known as a refund loan.

Regulators and defense teams have warned about the possible downsides of loans, especially those accompanied by high commissions or high interest rates. Personal finance experts generally do not recommend them.

Here’s what you need to know about loans during this tax period.

What is a tax refund loan?

A tax refund is, in simple terms, an advance on your tax refund, said Matt Schulz, chief credit analyst at LendingTree.

One way to borrow from your tax refund is to gain instant access to the funds: borrow the amount from a lender and give it a refund when you receive it from the IRS.

“Unlike many loans, it is not necessarily something you shop for,” Schulz said.

Tax refund loans are usually offered by a tax preparation company, Schulz said. You will not find them in your bank.

What are the pros and cons?

On the plus side, it eliminates the hassle of getting your refund right away, rather than waiting for the days or weeks it may take to get your money back from the IRS.

The disadvantage? “It can end up costing you,” Schulz said, in the form of interest or commissions.

Some tax companies will offer you a tax refund loan free of charge, Schulz said. However, you will need to pay the company to make your taxes for you.

“Even with a 0% loan there will still be a minimum you will pay to prepare your taxes,” he said. “So if you’re someone already planning to complete your taxes, this may not be so great.”

Theresa Murray, director of the Consumer Monitoring Bureau at the U.S. Public Interest Research Team, says the costs can outweigh the benefits.

“We are really urging people to avoid any kind of loan waiting to be repaid,” he said. “Anything you borrow for a refund that you have not yet received … just bad news is written everywhere.”

The North Carolina Consumer Council warns “think again” to anyone thinking of taking out a tax refund loan.

“While getting a tax refund advance may sound tempting, these loans are really payday loans and should be avoided whenever possible,” according to the council’s advice on its website. “The full amount must be repaid, as with any other loan, even if your refund is lower than expected or ends up not being repaid at all.”

When can I expect to receive a refund?

The IRS issues more than nine out of 10 refunds in less than three weeks, according to the Website. Taxpayers who file online will receive their deduction faster than those who post on their tax returns.

And the department is getting faster in delivering returns, Murray said. Now, some online fillers can expect to see the money in their bank account in a few days.

“If you file an application online, you can receive your money in four to six days,” he said.

North Carolina Taxpayers may receive their state tax refund later, but the good news is that the delay in accepting tax returns this year was due to a legislative reduction in individual tax rate.

Should I Consider a Tax Refund Loan?

Schulz said that if you really need cash – and read the terms carefully – a tax refund loan can be an alternative to more risky ways to top up your bank account.

“Emergencies happen: job losses, medical emergencies, whatever the case,” he said. “(In this case), there are worse things you could do than a tax refund.”

And assuming you did your taxes correctly, he said, a tax refund loan is a secured loan, with the actual refund working as collateral. This makes it significantly less risky than, for example, an unsecured payday loan with an extremely high interest rate.

Murray, on the other hand, warns of borrowing in any case. He suggests keeping it until you receive your discount, especially since it may not take long if you apply online and set up direct deposit.

“If you are so short on money, find a friend or relative to borrow money for a few days,” he said. “Do not follow the path of the loan to repay the money, because it is just ridiculously expensive; you pay for your own money.”

While this year ‘s tax filing period ends without the risk of government shutdown, in the future it could make these loans even more dangerous, according to the North Carolina Consumer Council.

“Frequent shutdowns by the federal government can make these types of loans more attractive if you want to get your money back quickly, which can complicate matters. “Remember that the delay in issuing your refund will not be taken into account by the lender and will not relieve you of any obligation to repay the loan on time,” says its website.

Schulz added that large tax companies – such as H&R Block or Jackson Hewitt – only apply for tax refund loans for a specific period, often between December and February. Thus, for these applicants, the loan application window may already be closed.

And Murray had one piece of advice for those who have not yet submitted: start early next year.

“When you are in a hurry, you are more likely not to be careful,” he said. “Whenever you have the words ‘I’m not paying attention’ and ‘IRS’ in the same sentence, it’s not good.”


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