How And Why You Should Avoid Tax Refund Loans This Tax Season

Tax season is upon us, and it’s no surprise that this can be strange for everyone. While being in debt isn’t always fun, tax season for people paying off debt may include planning big purchases from new furniture to electronics. Some people use their tax refund to pay for a vacation every year.

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Tens of millions of families lose money when they file their taxes every year. In fact, the Internal Revenue Service (IRS) reported that 96,274,000 households received an average refund of $3,039 in 2022 for the 2021 fiscal year. 95,632,000 customers received an average refund of $2,827 a year earlier.

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Although the fact is that refunds are made with customer money, and it indicates that someone has given a loan without interest to the government. worst, Many Americans choose to get their refund faster with the help of a tax refund loan.. While a tax refund loan may not seem like a big deal since your refund will eventually be paid, there are some serious issues that come with this type of financial product.

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What is a Tax Refund Loan?

Before we go into all the aspects of tax refund loans, I want to explain how these loans work. Basically, tax refund loans – also known as “refund anticipation loans” – are short-term loans that use your tax refund as collateral. You can often apply for a tax refund loan with your tax preparer when you file your taxes, and this will help you get your money quickly.

Almost all major tax filing companies offer their own personal loan repayments each year, and their terms can vary. Although some loans are expected to return money better than others, these loans are not free, and are often filled with good writing and hidden information.

Pay and Print Well

Michael P. Griffin, a professor of finance and accounting at the University of Massachusetts Dartmouth, said that the worst part of the loan repayment plan comes in the form of fees and good books that are expensive. .

In fact, many tax refund loans come with high interest rates and fees that can eat into the amount of tax refunds, Griffin said.

Take the Early Refund Advance Loan from Jackson Hewitt, for example. This tax refund loan has an interest rate of 6% of the loan amount, and the annual percentage rate is 34.22%.

Although Jackson Hewitt offers a “no fee” loan, not everyone can qualify.

According to the Financial Industry Regulatory Authority (FINRA), some loans that are expected to be repaid come with additional fees that may not be fully understood. These can include loan application fees of more than $100, tax fees of about $40, paycheck fees, fees for setting up a temporary account, and more.

When all the hidden costs are combined, FINRA says you can expect to pay about $200 in fees per $2,000 tax refund, or 10%.

Debt Cycle

In addition to paying unnecessary fees, Griffin said there is a risk that a tax refund could be delayed or reduced for a variety of reasons. When this happens, the borrower may not be able to repay the loan.

If you think you’re getting $3,000 back but your actual tax refund is less than $2,000, for example, you’ll be on the hook for paying the difference. However, you may not find this out until at last you spend the money and it’s too late to adjust your loan amount.

Griffin also said that some critics argue that tax refund loans can create a cycle of debt for taxpayers who are struggling financially. For example, consumers may use their tax refund loans to pay off debts that accrued throughout the year, but without making any payments. lifestyle changes that prevent them from accumulating debt over time.

They may decide to keep the same level of deductions from their paychecks in order to get a bigger refund next year as a result. Finally, they may decide to take out a tax refund loan to get their money faster, even if it means sacrificing a portion of their refund along the way.

How to Avoid Tax Refund Loans

In order to avoid the high prices and fine print associated with reverse payday loans, you don’t have to get one. At the very least, check around for tax refund loans with no extra fees to see if you can qualify. I’ve already mentioned how Jackson Hewitt offers a free loan option, and other tax preparers like TurboTax offer similar free return loans with no interest required.

Paul T. Joseph, an attorney and accountant for Joseph & Joseph Tax & Payroll in Williamston, Michigan, adds that another way to avoid tax refund loans involves filing your taxes early. can you.

“Once you get all your documents, it’s best to file them as soon as possible, and do it through the e-file program at the IRS,” said Joseph, adding that customers Those who file early can get their tax returns back in. it takes about 10 days if they choose to have their refunds deposited directly into their bank account.

According to Griffin, other ways to avoid having to pay off a loan include saving money throughout the year to cover any unexpected expenses and exploring other financing options. For example, borrowing from friends or family, using a credit card, or applying for a personal loan from a bank or credit union can be much cheaper than the worst repayments. the tax on loans.

In the long run, you might even consider adjusting your withholding to your paycheck so that you get more of your hard earned income throughout the year. Your tax refund will eventually decrease in March or April each year, but it can improve your cash flow every time.


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