For many people, an annual tax refund provides an important source of much-needed income to pay down debt, catch up on bills, make repairs, or go on a vacation. Regardless of why you need the money, chances are good that you are really eager to get your tax return. Unfortunately, many people are so eager that they obtain a refund anticipation loan from a tax preparer. Obtaining a refund anticipation loan can be an extremely costly endeavor and it is important you understand the true cost of these types of loans before you sign on the dotted line.
The True Cost of a Refund Anticipation Loan
The cost of a refund anticipation loan can vary slightly depending upon the company that is offering the loan. In general, however, you may end up paying:
- Interest on the loan (often, the interest rate is very high).
- An electronic filing fee
- A fee to apply for the loan
- A fee to cash the check when the loan is issued to you
In all, by the time you add up these costs, you may end up paying more than 10 percent of your total tax refund amount. This is a huge amount of money to pay just for the privilege of having your tax refund paid a little bit sooner.
What to Do If You Are Considering a Refund Anticipation Loan
If you are eager for your tax return and are considering a refund anticipation loan, you should explore all of your other alternatives first. A conventional short term loan from a bank, or even a balance transfer on a credit card may have more favorable rates and cost you less than taking out a refund anticipation loan. Of course, the best solution whenever possible is simply to put off any unnecessary expenses until you get your loan check from the IRS. If you are really stuck for cash, see if a family member might be willing to lend you the money until your tax return comes in (just be sure to pay them back!) You could even pay a small amount of interest to a family member willing to lend you money and still come out ahead when compared to a refund anticipation loan.
If you really have no other options and you need a refund anticipation loan, be sure to shop around and to ask questions. Before taking out the loan, you should ask:
- What the loan interest rate is
- What fees you can expect to pay on top of the loan interest rate
- What will happen if you end up getting a smaller tax return than you anticipated.
The law mandates that those who provide refund anticipation loans provide details on fees (including the total dollar amount of fees and the estimated annual percentage rate) in writing. Do not take the loan until you have obtained this information and shop around for different refund anticipation loan providers to see who offers you the loan at the lowest overall cost.