How to Get a Tax Refund Loan

Taxpayers who want to receive their tax refund immediately may file their taxes with a business that offers them the option of a tax refund loan or Refund Anticipation Loan (RAL). The tax preparer assesses the refund that the taxpayer can expect to receive and then issues the taxpayer that money. Although this may seem like a win-win situation, the RAL system has come under criticism for charging high fees and interest rates to people who are essentially borrowing their own money. Mahalo's guide on how to get a tax refund loan offers an introduction to the process, a description of the risks and fees involved, and suggested alternatives to RALs.
Tax Refund Loan Tips
1. Tax refund loans are also called Refund Anticipation Loans (RALs)
2. RALs may also be referred to as "fast cash" or "instant" tax refunds
3. RALs allow you to receive your tax refund money immediately
4. Your tax preparer will likely charge you an RAL fee
5. When taking out an RAL, you are, in essence, paying to borrow your own money
6. Many professionals advise against taking out an RAL
7. The interest charged on RALs is usually in the triple digits
8. Be certain to read and fully understand the RAL agreement before signing it
Disclaimer

The content in this page is not a substitute for professional financial advice. Please contact your financial adviser before using the information presented here.

Introduction
- Tax refund loans, often referred to as Refund Anticipation Loans (RALs), are offered by some professional tax preparers as a way for taxpayers to receive their refunds almost immediately, rather than having to wait weeks to receive their refund from the government. However, these loans have been criticized by many industry professionals since the fees and interest charged are relatively high. Although this guide provides an introduction to RALs and briefly discusses the arguments against them, it is always best to seek out a professional for advice on taxes and other financial matters.
About Tax Refund Loans
- When filing your tax return through a business, they may offer you the option of a "fast cash" or "instant" refund. Despite these alternate names, what you are actually being offered is a Refund Anticipation Loan, meaning that the business through which you file your taxes is advancing you your refund money before it is actually paid out. Rather than waiting weeks for the government to mail you your tax refund check or deposit the money in your account, an RAL allows you to receive your tax refund right away. When you sign up to receive an RAL, the tax preparer electronically files your tax return for you and then advances you the money he has estimated you'll receive as a return. Once your tax return is completed, the IRS then deposits the funds into the loan issuer's account.Wisconsin Department of Revenue: Refund Anticipation Loan (RALs) Forbes.com: Beware Of Tax Refund Loans (February 13, 2006)
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Criticism of Tax Refund Loans
1. Although receiving your tax return almost immediately via an RAL rather than having to wait a few weeks is tempting, many industry professionals advise against RALs for the following reasons:
3. The interest charged on RALs can run as high as 264%, much higher than the interest charged on other loansBankrate.com: Cheap, fast refund loan alternatives
4. If you don't have a bank account, you will likely be paying another three to seven percent of your refund to cash your refund checkMSNBC: E-filing can make high-fee loans unnecessary (February 15, 2006)
5. The business from which you receive your RAL will usually charge you at least $100 in feesNew York Life: Are Tax-Refund Loans A Good Deal?
6. If you receive your tax refund in the form of a prepaid debit card, you will incur additional ATM and other fees when you use the cardMSNBC: E-filing can make high-fee loans unnecessary (February 15, 2006)
7. You are essentially paying these fees and interest rates to borrow your own money
8. If your tax return is delayed or denied by the IRS for any reason, you are responsible for paying back the RAL to the issuing party at high interest ratesForbes.com: Beware Of Tax Refund Loans (February 13, 2006)
9. If you have already spent your tax refund money and cannot pay it back in a timely manner, the lender may turn it over to a collection agency, thus damaging your credit ratingForbes.com: Beware Of Tax Refund Loans (February 13, 2006)
10. As discussed below in the Alternatives section, by filing your taxes electronically and signing up for direct deposit you can receive your tax return from the IRS in as little as ten days
Alternatives to Tax Refund Loans
File Electronically
In the days before electronic filing was available and refund recipients were forced to wait several weeks to receive their tax return, it may have made more sense to sign up for an RAL. However, if you file your return electronically and sign up for direct deposit while doing so, you can receive your state tax return in less than a week and the IRS will deposit the funds into your account within 10 to 14 days.Wisconsin Department of Revenue: Refund Anticipation Loan (RALs) Forbes.com: Beware Of Tax Refund Loans (February 13, 2006) As of 2009, the IRS' Free File program allows people to enter and submit their tax information using online forms, meaning that it is no longer necessarry to purchase and download tax software.Bankrate.com: Cheap, fast refund loan alternatives
Sign up for Direct Deposit
As mentioned above, if you sign up for direct deposit, the IRS will deposit your tax refund directly into your checking or savings account. Using direct deposit, you will usually receive your refund in less than two weeks. Direct deposit also eliminates the possibility that your refund check will be lost, delayed or stolen.FDIC: Expecting a Tax Refund? Beware of Costly Loans and Other Pitfalls
Avoid Overpaying Your Taxes
Rather than waiting for the end of the year to receive a large refund from the IRS, consider adjusting the amount your employer withholds from your income each month. By increasing your amount of "personal allowances" on the W-4 you file with your employer, you will pay less in taxes and take home more money each month. However, assess your current and near future financial situation and earnings before doing so, or you will run the risk of having to pay taxes at the end of next year if your income increases significantly.FDIC: Expecting a Tax Refund? Beware of Costly Loans and Other Pitfalls
Open a Savings Account

If you are using these monthly tax over payments as a type of savings plan, open a savings account and ask your employer to automatically deposit your previously over-withheld money into this account. You will still be taking home the same paycheck, but instead of "loaning" your money to the government interest-free, you will be earning interest on your savings. This means that if you choose to withdraw your savings at the end of the year, you should receive more money than you would on a tax refund.New York Life: Are Tax-Refund Loans A Good Deal?
Conclusion

Although receiving your tax refund loan immediately by taking out an RAL is tempting, most professionals argue that the costs outweigh the benefits. Of course, the choice ultimately lies with you since it is your money, but keep in mind that by taking out an RAL, you are actually paying a fee to borrow your own money.Forbes.com: Beware Of Tax Refund Loans (February 13, 2006)
If you do choose to enter into an RAL agreement, be sure to read it in detail and ensure that you understand all its fees and provisions before signing it.Wisconsin Department of Revenue: Refund Anticipation Loan (RALs) If you have further questions about tax refunds and loans, seek out professional advice from a tax agent, the IRS or a professional financial adviser.
References for How to Get a Tax Refund Loan