Receiving a tax refund advance loan allows taxpayers to borrow funds from their upcoming tax return. This sounds great in theory. Who doesn’t want their tax return instantly?
Receiving your tax return can take up to weeks, depending on how you choose to receive your funds.
Still, a tax return advance loan could cost more than expected in fees and interest.
Learning the truth about tax return advance loans, including the real cost, the time expected to receive the funds, and where to get your loan will help you to make the best financial decision for you.
What Is a Tax Refund Advance?
A tax refund advance is a short-term loan, formally known as a refund anticipation loan (RAL), for people who are expecting a tax return and have not yet received the money from the IRS.
People who need their tax return money before the funds are made available can take out a tax return advance loan, typically offered by and financed through a tax preparation service.
These services include H&R Block, TurboTax, and Jackson Hewitt, among others. Banks and specialized lending services may also provide tax refund advance loans.
Your tax refund is what pays back the loan. The institution from where you get your loan will loan you an amount of money that they estimate will be the amount of your tax return, based on your financial information and tax documents.
Once your return is processed and your refund sent, the financial institution will take the amount of their loan plus any interest that is included in the loan from the return amount.
How Does a Tax Advance Refund Work?
A tax refund advance loan is only available after your taxes have been filed and before your tax refund is given to you.
You apply for the loan through your tax preparation service. You can only receive a refund advance loan through a specific tax preparation service, such as TurboTax, H&R Block, or Jackson Hewitt, if you use their services to file your taxes.
After formally filing your taxes through that service to the IRS, you can apply for that service’s tax refund advance loan.
The tax preparation service will calculate your estimated refund by looking at the information provided on your tax documents. Based on this number, the loan will be issued to you, either via a direct deposit into your bank account or a prepaid debit card. When the IRS issues your tax return, the return is used to pay the loan amount
How Is the Loan Funded?
TurboTax requires that users who requested a refund advance loan open a checking account with Credit Karma Money, as this is where the loan will be deposited.
The only way that H&R Block disburses the loan is via loading the loan amount onto an H&R Block Emerald Prepaid Mastercard that you will receive.
Loans from Jackson Hewitt may be disbursed via direct deposit to a bank account of your choice or via an American Express Prepaid Card.
Because advance refund loans do not carry the same risk as typical loans, your credit score is not a deciding factor for qualification and therefore will also not be impacted by the loan.
How Much Does a Tax Refund Advance Loan Cost?
The “price” of a tax refund advance loan varies across providers.
The amount of the loan that a tax preparation service will give you is estimated, and it is the closest approximation that a tax preparation service can make, based on the information that you provided for them to complete your taxes.
This is the initial amount that you will be responsible for paying once your tax refund is issued to you.
Fees and Interest Rates
In addition to this amount, different tax preparation services charge various fees and interest rates. Tax refund advance loans from H&R Block and TurboTax offer no loan fees and 0% APR. In other words, the only amount that you would be responsible for paying back is the cost of the loan itself.
Jackson Hewitt offers two different kinds of refund advance loans. The first is a “No Fee Refund Advance Loan,” which offers no loan fees and 0% APR. This specific loan is still secured by filing your taxes through Jackson Hewitt but is offered by Republic Bank & Trust Company.
The second type of refund advance loan offered by Jackson Hewitt is the “Early Refund Advance Loan.” As the name suggests, this loan is available almost a full month earlier than the no-fee loan. This loan comes with an interest rate and a hefty APR.
Contact your tax preparation service for more detailed information about the cost of a tax refund advance loan.
What Amount of Loan Can You Get?
Jackson Hewitt has a relatively small variation in the loan amounts that they offer. The “Early Refund Advance” loan, offers $300, $500, and $1,000 loans. For their “No Fee Refund Advance,” loan sizes are $500, $750, $1,000, $1,500, $2,500, and $3,500.
After determining the estimated amount that your tax return is expected to be, Jackson Hewitt disburses the amount that is closest to that approximation.
H&R Block will match your estimated tax return up to $3,500.
TurboTax offers large variations in the available amounts for their tax return advance loan amount.
However, they do not offer a loan that will match the full amount of your estimated tax return. The smallest tax return estimated amount that TurboTax will offer a loan for is $500 and they will only offer $250 for that amount.
The maximum loan amount it offers is $4,000.
Pros and Cons of Refund Advance Loans
While a refund advance loan is a good way to get the money you may urgently need, it also comes with some caveats you need to be aware of. Here are some pros and cons of these loans.
What Are Some Alternatives to Refund Advance Loans?
Refund advance loans can have many limitations and caveats.
There are better alternatives to these kinds of loans that may be more cost effective.
Waiting for Your Tax Refund
In the event that your tax preparation service tacks extra fees and interest rates onto the principal cost of the loan, you could save hundreds of dollars by simply waiting for your refund to be disbursed directly to you by the IRS.
If you file your taxes online and have your refund directly deposited into your account, the wait could be as short as eight days.
Getting a Personal Loan
If you need money in a pinch, a personal loan could be a better option than a tax refund advance loan.
Personal loans tend to be more flexible than a refund advance loan and can be used for nearly any reason, anything from unexpected bills, emergencies, consolidating debt, and more.
Because a refund advance loan has to be paid back when you receive your IRS disbursed refund, the window for paying back the loan is much shorter than that of a personal loan.
Personal loans can provide a larger amount of money than a refund advance loan is capable of.
Because of the nature of a refund advance loan being based on the amount of your impending tax return and most return advance loan providers have a maximum loan limit of around $4,000, a personal loan is more effective for people needing more.
Personal loans can provide up to $35,000 and even more in some instances, depending on your credit history and score, the loan provider, your income, and your current amount of debt.
The interest rates on these loans tend to be higher than mortgage or auto loans, but the APRs are much lower than credit cards and most tax refund advance loans.
The Bottom Line
Because every U.S. citizen is obligated by law to file their taxes, the tax return advance loan market is large. Most tax preparation services and other financial institutions offer these loans.
It can sound appealing to get your tax return sooner than usual. It also does not seem like a refund advance loan will not cost much more than the amount of your tax return. However, the hidden fees and high interest rates may cause you to rack up debt.
If it is possible, it is best to avoid advance refund loans and consider a personal loan, or simply wait to receive your refund from the IRS.
Frequently Asked Questions
How long does it take to receive my tax refund advance loan?
It varies across providers. Some providers that offer direct deposit or a digital debit card can provide funds in as little as 15 minutes after your application is accepted.
A refund advance loan from H&R Block will be available on the same day. TurboTax will disburse the loan in as little as one minute after your application is accepted. Jackson Hewitt loan funds are available within one to five days.
How do I repay my refund advance loan?
Many providers will automatically deduct the cost of the loan from your tax return, before it is disbursed to you, including Jackson Hewitt, H&R Block, and TurboTax.
In the event that your tax return is not enough to cover the cost, your tax return from next year will be used to cover the remaining balance. In the event that there is a remaining balance, it will be disbursed to the method chosen when the advance return loan was first taken out.
Do I need a good credit score to be approved?
Not necessarily. The major tax preparation companies pull soft lines of credit instead of hard lines of credit when looking at your credit history approval. This also means that your credit score will not be affected by applying for an advance refund loan.
