Can I get a loan against my tax refund?

If you prepared your tax return through a tax-preparation service and you’re expecting a refund, you may be able to apply for a short-term loan against your anticipated federal income-tax refund. But taking a loan against your anticipated refund may have costs associated with it, as well as the risk that your refund won’t be as much as you expected.

Let’s take a look at how these refund-advance loans work, examine some of the pros and cons of a loan against your tax refund, and explore some possible alternatives.

• How a loan against your tax refund works
• Pros and cons of tax-refund-loans
• Tax-refund loan alternatives

How a loan against your tax refund works

A loan against your tax refund, also known as a refund-advance loan or a refund-anticipation loan, is a type of secured loan. This means that collateral is used to guarantee the loan (in this case, your anticipated tax refund). Refund anticipation loans may have fees and interest, or they may be marketed as “no-fee” — although they usually have other costs associated with them. Refund-anticipation checks, another kind of refund-advance product, is a loan for the tax-preparation fee from your refund.

Tax-refund loans are short-term loans and must be repaid when you receive your tax refund. Banks typically partner with tax-preparation services to offer these loans to their customers.

You’ll usually receive your refund-advance loan as a deposit into a bank account, or on a prepaid debit card. When the IRS issues your refund, it will be deposited into that bank account or onto the prepaid debit card, and the loan amount and any interest or fees will typically be deducted from the account.

Tax-refund loans marketed as “no-fee” are usually for smaller advance amounts than loans that charge interest, but products vary. The amount you can borrow depends on factors such as the lender, the tax preparer, and your financial and credit health.

When can I get a tax refund loan?

In order to apply for a tax refund loan, you’ll generally have to first file your federal income tax return. Each year, the IRS announces the start of tax season when it begins accepting tax returns for the previous year’s taxes. You may be able to file your return earlier than the official first day of tax season, but the IRS won’t process it until the season begins.

In 2021, the IRS will begin accepting returns on Feb. 12 for the 2020 tax year, although typically tax season begins in late January. If you’re thinking of applying for a refund advance loan this year, check with the lender or tax preparer to see if the later opening of the season might affect their lending time frames.

Pros and cons of tax-refund loans

There are some pros and cons to consider when thinking about whether applying for a tax-refund loan may be a good option for you.

Pro: Faster funding

If you apply and are approved for a tax-refund loan, the funds may be available quickly — in as little as 24 hours from certain banks if you choose to receive funds via a prepaid debit card. That’s a lot faster than the 21 days the IRS says it typically takes to issue a refund when filed electronically. But remember, a refund-anticipation check, which is only a loan of the tax-preparation fee, won’t get you your refund any faster.

Con: Usually not free

Getting a tax-refund loan may or may not involve paying interest. But even if the refund-anticipation loan you’re approved for doesn’t assess interest, there may be fees. For example, refund-advance products typically come with administrative fees associated with transferring your refund.

Every tax preparer is different — some may offer tax-refund loans with no interest or fees while others may charge interest and fees on the loan. It’s important to understand the fees and interest for your refund loan, and read your refund-loan agreement to ensure you’re actually getting the type of loan you thought you applied for.

Con: Early tax season deadlines

Deadlines to get an advance from an online tax preparer are early — typically in February, well before you may have planned to prepare and file your taxes.

Con: A significant risk

The potential risk with any kind of refund loan is that the amount of the loan is based on how much you anticipate getting back in a refund. But many factors could make your actual refund amount different than what you expected.

For example, if you owe a federal or state debt, child support, back taxes or student loans, the IRS can reduce the amount of your refund. When that happens, you could wind up with a lot less money than you anticipated after you’re done repaying your refund loan and any associated fees.

Tax-refund loan alternatives

There are a few alternatives to consider if you’re not sure whether a tax-refund loan is right for you.

• Small personal loan — If approved, you may be able to get a small personal loan for $1,000 or less through some online lenders.
• Credit cards with introductory 0% APR offers — If you’re approved for an intro 0% offer, making all your payments on time and paying the balance off before the promotional period ends means you won’t pay interest with this option.
• Payday alternative loan — Offered by federal credit unions, these small short-term loans can’t charge more than 28% interest (compared to the equivalent of 400% APR or higher for typical payday loans).

Bottom line

While tax-refund advance loans can be an option to quickly get the cash you need, there are many things to keep in mind before you decide if applying for this type of secured personal loan will work for you. If you do decide to apply for a tax-refund advance, here are a couple of tips.

• Proceed with caution. These loans could come with a high cost because of potential interest and hidden fees.
• Read the terms and conditions carefully. Ask questions if something isn’t clear and make sure you understand just how much the loan will actually cost, including any related fees for the account or prepaid card associated with the loan.