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.http://www.libertytax.com/refund-and-loan-options.html 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.http://www.revenue.wi.gov/faqs/pcs/ral.html 

While 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. For people who are carrying a balance on their credit card or have previous consolidation debt, it may be wise to consider consolidating that debt and evaluating overall gains rather than tax specific income.http://www.kiplinger.com/columns/ask/archive/beware-refundanticipation-loans-.html

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 (RAL), 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 will receive as a return. Once your tax return is completed, the IRS then deposits the funds into the loan issuer's account.http://www.revenue.wi.gov/faqs/pcs/ral.htmlhttp://www.forbes.com/2006/02/10/taxes-loans-refunds-cx_sr_0213taxrefund.html 

Although receiving your tax return almost immediately via an RAL rather than having to wait a few weeks can be tempting, many industry professionals advise against RALs for the following reasons:

1. The interest charged on RALs can run as high as 264%, much higher than the interest charged on other loans.http://www.bankrate.com/brm/itax/news/20010301a.asp
2. If you do not have a bank account, you will likely be paying another three to seven percent of your refund to cash your refund check.http://www.msnbc.msn.com/id/11362964/
3. The business from which you receive your RAL will usually charge you at least $100 in fees.http://www.newyorklife.com/cda/0,3254,15139,00.html 
4. 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 card.http://www.msnbc.msn.com/id/11362964/ 
5. You are essentially paying these fees and interest rates to borrow your own money.http://www.msnbc.msn.com/id/11362964/
6. 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 rates.http://www.forbes.com/2006/02/10/taxes-loans-refunds-cx_sr_0213taxrefund.html 
7. 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 rating.http://www.forbes.com/2006/02/10/taxes-loans-refunds-cx_sr_0213taxrefund.html
   

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

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 been financially useful 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.http://www.revenue.wi.gov/faqs/pcs/ral.html 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.http://www.bankrate.com/brm/itax/news/20010301a.asp 

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.http://www.fdic.gov/Consumers/consumer/news/cnwin0405/tax.html 

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.http://www.fdic.gov/Consumers/consumer/news/cnwin0405/tax.html 

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.http://www.newyorklife.com/cda/0,3254,15139,00.html 

Most professionals argue that the costs outweigh the benefits when it comes to taking out a tax refund loan. Of course, the choice ultimately lies with you, but keep in mind that by taking out an RAL, you are actually paying a fee to borrow your own money.http://www.forbes.com/2006/02/10/taxes-loans-refunds-cx_sr_0213taxrefund.html

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.http://www.revenue.wi.gov/faqs/pcs/ral.html 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. 

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