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A tax refund advance is a short-term loan that you pay back with your tax refund. The amount you can borrow depends on your expected refund and other factors. (Shutterstock)
Your tax return isn’t due until April, but if you’re expecting a tax refund, you might not want to wait that long. You may be able to get some of that money sooner from a tax refund advance loan.
A tax advance is a short-term loan offered either by the company preparing your tax return or by a third-party lender. This article will help you figure out if a tax refund advance loan is right for you.
What is a pre-tax loan?
A tax refund advance, also known as a refund advance loan (RAL) or refund expectation loan, does not give you early access to your IRS refund. Instead, you can take out a loan against a portion of your expected tax refund. Tax advance loans are short-term loans — typically for a month or less — or until the IRS sends your full refund to your accountant.
Tax preparation and filing companies are the most common places to go for refundable advance loans, but you may also find them at auto or boat dealerships, furniture and electronics stores, and other retailers. The application deadline for these loans is usually the end of February.
How Much Can You Get on a Pre-tax Loan?
The amount you can borrow with a repayment advance loan depends on the company offering the loan and your expected federal income tax return. For example, H&R Block and Jackson Hewitt offer tax refund advances of up to $3,500, while TurboTax refunds loans up to $4,000 and Liberty Tax advance loans up to $6,250.
However, don’t expect to be able to borrow the full amount if your projected refund is less — most refund advance lenders will only loan you about 25% to 50% of your projected tax refund.
For example, with TurboTax, if your expected federal refund amount is between $500 and $999, your maximum advance refund is $250. For refunds from $1,000 to $1,499, you can borrow up to $500, and so on. To receive the full $4,000 loan amount, your expected federal tax refund would need to be $8,000 or more.
If your refund isn’t high enough to qualify you for an amount of credit that meets your needs, you can consider a personal loan instead. Check out Credible for a quick and easy way to compare personal loan rates.
When will you receive your loan funds?
How soon you get your tax refund after you’re approved depends on the lender, but many companies advertise that you can get money the same day you apply.
Are you eligible for a pre-tax loan?
Not everyone is eligible for a pre-tax loan. While eligibility requirements vary from company to company, typically you must:
- be 18 years or older
- Agree to electronically file your federal income tax return
- Have a valid US address
- Have income on a Form W-2, 1099-R, Schedule C, or Schedule C-EZ
Lenders may also consider your payment history with the IRS and whether you have any defaulted federal student loans, delinquent child support, tax liens, or other situations that could result in the IRS withholding all or part of your tax refund.
Some companies allow you to pre-qualify online to give you a better idea of whether you will be approved and how much you may be allowed to borrow. To prequalify, you must provide your social security number, past year’s reimbursement amount, and contact information. Just remember that prequalification is no guarantee that your loan will be approved. You still need to make a formal loan application when filing your tax return.
How much does a pre-tax loan cost?
The cost of a payback loan varies depending on the lender. Many national tax chains, including H&R Block and TurboTax, promote repayable advance loans with no financing costs, no loan fees and 0% APR. However, you must agree to pay a fee to have your tax return prepared and filed electronically. This fee varies by company and may depend on how complicated your tax return is.
Other companies charge advance loans for tax refunds. For example, Jackson Hewitt doesn’t charge a loan fee, but its Early Refund Advance Loans have an APR of 35.9% for 2022. Similarly, Liberty Tax charges an APR of 35.99%.
Fees for an advance loan with a refund typically range from $30 to $50, according to the Consumer Financial Protection Bureau. Most companies that offer these loans will deduct your tax preparation fees, loan fees, and interest from your refund. You also need to watch out for hidden fees. For example, if your credit funds are loaded onto a prepaid debit card, transaction fees for using the card may apply.
Another option is to take out a personal loan. Credible makes it easy to compare personal loan rates quickly and easily.
How do you apply for a pre-tax loan?
While the exact process for applying for an RAL varies by lender, it typically looks something like this:
- Select a tax advisor. You select a tax preparation provider – either by visiting a store near you or online – and consent to having the provider prepare and file your tax return electronically. Let the creator know that you want to request a repayment advance.
- Apply for an advance loan for tax refund. Once your return is complete, the Provider (or its partner lender) reviews your tax return, takes into account your income, credit, and reimbursement amount, and decides whether to approve your loan.
- Get the loan funds. If your loan application is approved, the tax preparation provider or lender will issue your loan via a paper check (which may incur an additional fee), a prepaid card, or a wire transfer to your regular bank account. The tax preparer will also set up a temporary bank account in your name and instruct the IRS to deposit your refund into that account.
You may find that before you can find out if you’re eligible for the loan and how much you can borrow, you need to select your accountant and have your tax returns prepared. This makes it difficult, if not impossible, to look for the best tax prep fees and loan terms.
How is the loan repaid?
You pay back your tax refund advance from your tax refund. The tax preparer or lender will deposit your tax refund into a temporary bank account in your name, and then deduct the loan balance, tax preparation fee, and any other applicable fees and interest charges from the account before remitting the balance to you. Depending on your lender, you may receive the balance of your tax refund by check, prepaid card, or wire into your bank account.
This makes advance loans with tax refunds risky. The loan is based on how much you expect to get back from the IRS, and your actual refund amount may be less than what you expect.
For example, if you pay taxes back to the IRS or your state tax agency, withhold child support, or default on federal student loans, the Treasury Department may seize all or part of your refund to pay off that outstanding debt. It is also possible that an error in your tax return will affect the amount of your tax return.
If your actual tax refund is less than the loan balance, tax preparation fees, and other RAL-related fees and interest, you could owe the lender money instead of receiving a refund.
Why should you consider a pre-tax loan?
A tax advance loan can be helpful for taxpayers in the following situations:
- You expect a substantial refund.
- You don’t owe taxes, child support, or defaulted student loans.
- You need the money right away to cover immediate expenses.
- You are working with a tax advisor who does not charge interest or fees on an RAL.
For example, if you have unpaid rent, utilities, or other bills, an RAL can help you save money and avoid eviction, having your utilities shut down, or additional fees and penalties.
But if you don’t need the money right away, you can save money by using a free tax return option, filing your tax return electronically and having your refund deposited directly into your bank account. The IRS states that it issues more than 90% of tax refunds in less than 21 days and that using e-file and direct deposit is the fastest way to get your refund.
If your adjusted gross income is $73,000 or less, you may qualify for a free guided tax preparation through IRS Free File. You may also be able to get free tax preparation assistance from trained volunteers through the IRS’s Volunteer Income Tax Assistance (VITA) or Elderly Tax Counseling (TCE) programs. Visit the VITA/TCE Locator page to find a location near you and to schedule an appointment.
What alternatives are there to the pre-tax loan?
An advance loan with repayment isn’t your only option when you need money fast. Consider these alternatives:
- Private Loan – If you need more money than you can get with an RAL, it may make sense to take out a personal loan. Shop online to ensure you get the best price and terms.
- Low-interest credit card — Depending on your credit history, you may qualify for a credit card with a low or 0% introductory APR. If you can withdraw the balance before the end of the promotional period, you will not pay any interest.
- Peer to Peer Lending — Peer-to-peer loans are similar to personal loans, but are funded by individual investors rather than financial institutions. These individuals may be willing to lend to individuals who cannot qualify for a traditional bank loan.
If you decide to get a personal loan instead of an RAL, visit Credible to compare personal loan rates from different lenders in minutes.
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