What is a tax refund loan?

A tax refund loan (also known as a “tax refund advance” or “refund anticipation loan”) is a short-term loan, typically available through a tax preparation company, that allows you to get a portion of your expected tax refund amount early.¹ Tax refund loans don’t give you access to your actual tax refund issued by the Internal Revenue Service (IRS). A lender issues an equivalent or lesser amount as a loan that your refund automatically repays once it arrives.

If you need extra money quickly during the tax season, a tax refund loan may be a solution. But it’s important to understand how a tax refund loan works and consider potential drawbacks before you take the leap.

How does a tax refund loan work?

Many of the large tax preparation services offer tax refund loans for clients who expect to receive a refund. The tax preparation company often partners with a bank or lender to issue the funds.² When you’re approved for the loan, you sign your tax refund over to the tax preparation company, and the loan (along with an interest and fees) is repaid from the refund when it’s available. If there’s any money left over, the tax preparation company will send it to you.

You may only apply for a tax refund loan when filing your tax return during tax season. If you’ve already filed your taxes, you can’t submit an application.

Eligibility requirements

Requirements for tax refund loans vary across lenders, but the following factors may affect what you’re eligible for:

• Tax preparation: You must have your taxes prepared by the company that facilitates the loan.
• Refund: You only qualify for a tax refund loan if you’re anticipating a refund from the IRS. Some lenders may also have a minimum dollar amount requirement for your expected refund.
• Credit: The lender may not have strict credit score requirements, but they might still review your credit report.³

Getting a tax refund loan

The tax refund loan process depends on the lender and tax preparation company, but most follow similar steps.

1. You apply for a loan through your tax preparation company at the same time you file your tax return.
2. The lender reviews your tax return, loan application, and anticipated refund to determine the loan amount you may qualify for.
3. If your application is approved, you receive funds quickly — often in as little as a day — in your bank account, on a prepaid card or in a checking account designated by the tax preparation company.⁴
4. When the IRS issues your refund and sends it to the bank, a portion is automatically used to repay your loan and cover any fees and interest.
5. You receive any remainder of your refund amount. If your refund is lower than anticipated, you are still responsible for paying back the rest of the loan.

Your possible loan amount and fees depend on your lender. Many tax preparation companies offer set loan amounts, like $500, $1,000 or $1,500. They may also charge fees for their services. Some tax refund loans are interest-free, while others may charge interest, reducing the value of your refund.⁵

Pros and cons of tax refund loans

While a tax refund loan may help out in a pinch, it’s important to weigh the advantages and disadvantages.

Pros

• Speed: You may get money in only a few days or less to cover urgent expenses instead of waiting for your tax refund.
• No interest with some services: Many tax preparation companies offer packages that include no-interest loans.
• Lenient credit requirements: Lenders may not need to conduct a hard credit check as part of the application process.
• Simplicity: The loan is typically repaid automatically through your tax refund, so you don’t have to worry about keeping track of payments.

Cons

• Fees and interest: You may have to pay fees in addition to the cost of your tax preparation services. Plus, some lenders may charge interest. Remember, fees and interest come out of your refund amount.
• Availability: You’ll need to use a tax preparation service to get a tax refund loan, and not all tax preparers offer them.
• Timing: In most cases, you’ll need to file your taxes early in tax season (usually between December and February) to qualify for a tax refund loan.⁶ If you need money in August, for instance, a tax refund loan likely won’t be an option.
• Limited funds: Your loan is typically limited by your refund amount. In fact, the maximum amount you can borrow from many lenders may be smaller than your total anticipated refund to account for tax prep fees, other fees and possibly interest. If your refund is less than expected, you’ll still need to pay back the loan according to the lender’s terms.

What to consider before applying

A tax refund loan might seem appealing if you have a pressing expense, but you should ask yourself some questions before applying.

How soon do you need funds?

Before you apply, consider whether your purchase can wait for your refund to arrive. In most circumstances, a tax refund loan will not get you your money much faster than you’d otherwise receive your refund.

If you file your return electronically and opt for a direct deposit, your refund will usually arrive in 21 days or less. Potential causes for delays might include errors or missing information on your return or the inclusion of certain claims that take longer to process, like the earned income tax credit.⁷

How much will the loan cost?

Loan fees, tax preparation fees, and possible interest charges come out of your refund amount. While you may decide that getting money sooner is worth a smaller refund, it’s worth considering how much money you’re willing to sacrifice.

What are the loan terms and conditions?

Always review the terms and conditions carefully before applying — for instance, whether interest is charged. Make sure you understand what might happen if your refund is delayed or smaller than expected.

Alternatives to tax refund loans

If a tax refund loan doesn’t seem like the best fit for you, consider the following alternatives when you need to pay your bills before your tax refund arrives.

Apply for a personal loan

With a personal loan, you borrow a lump sum and repay what you owe, including interest, over a set period of time (usually around 2-5 years) in predictable monthly payments. Unlike a tax refund loan, your loan amount is based on factors like your income, credit history and credit score, so it may be a better fit if you need more money than you expect to receive from your tax refund. Other lenders may have different ways of evaluating applicants, but OneMain works with a wide range of customer credit scores and takes your whole financial picture into account to help you find a personal loan that’s right for you.

If you’re approved for a personal loan, you may see secured or unsecured next to your offer. A secured loan requires you to provide collateral, like a car, which the lender may take if you don’t repay the loan. An unsecured loan doesn’t require collateral. You may be more likely to be approved, get a favorable interest rate, or qualify for a higher loan amount with a secured loan than an unsecured loan.

Some personal loans have a quick turnaround from signing the loan agreement documents to receiving the money you need. With OneMain, for example, you can get your money as soon as an hour after signing the loan documents if you’re receiving the funds on your debit card. Funds can also be paid out by direct deposit (ACH), which is available approximately 1-2 banking days after the loan closing. A paper check can be issued as soon as the same day as the closing.

After you receive the funds, you’ll begin repaying the loan. Then, when you get your tax refund, you could even use it to help pay off the loan faster — many lenders, including OneMain, don’t charge prepayment penalties, which are fees for paying off your loan ahead of schedule.

Use your emergency fund or other savings

If you have enough money set aside in an emergency fund or elsewhere, tapping into your savings may be your simplest option for urgent expenses. If you get a tax refund, you could then use it to replenish your savings.

Ask about payment plans

If you need to cover an outstanding or upcoming bill, contact the service provider and explain your situation. They may let you set up a plan to pay smaller amounts over time. When you receive your refund, you can use it to repay some or all of the amount you owe.

Borrow from friends or family

A trusted friend or family member may be able to lend you money while you wait for your tax refund to arrive. Just make sure you communicate clearly about repayment expectations to avoid conflicts.

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File with confidence, borrow with clarity

If you need money quickly, a tax refund loan may help you bridge the gap. But other options, like using your savings or applying for a personal loan, may get you the money you need while allowing you to hold onto more of your refund.

Whether you choose to apply for a tax refund loan or wait for your refund to come through, a thoughtful plan can help you make the most of your money.

Sources

1.https://files.consumerfinance.gov/f/documents/cfpb_tax-refund-products-handout.pdf
2,3,4,6. https://www.nerdwallet.com/article/loans/personal-loans/tax-refund-loans-give-cash-now-to-early-filers
5. https://www.bankrate.com/loans/personal-loans/what-to-know-about-tax-refund-loans/
7. https://www.irs.gov/newsroom/why-it-may-take-longer-than-21-days-for-some-taxpayers-to-receive-their-federal-refund