When you need cash fast, it can be a pain to wait for your tax refund, which can take about 21 days to land in your account.
That’s one reason getting your refund in advance — known as an advance, a refund anticipation loan, or a tax-refund advance loan — can be tempting. In fact, tax companies issued some 1.7 million of them in 2017, according to a report from the National Consumer Law Center, a nonprofit based in Boston.
But if you’re considering getting one, there are a few things to know first.
What is a tax-refund advance?
In recent years, some major tax preparation companies including H&R Block HRB, +0.54% and Jackson Hewitt have been offering customers an “advance” on their refunds.
Companies often offer them with no interest, but customers are required to file their taxes with that tax preparer to get the refund.
That’s a major reason the tax prep companies offer them: They want to get customers in the door, said Nick Clements, the co-founder of the personal finance website MagnifyMoney.
The companies calculate what they think the customer’s refund will be and give them an advance on it, or a portion of it, said Andrea Coombes, a tax specialist at the personal-finance company NerdWallet. The companies typically give the advances up to a certain limit, so taxpayers expecting a particularly large refund may not be able to get the whole thing through an advance, Clements said.
The refund advance, although it may not carry any interest, comes in the form of a loan, through a bank or other institution that partners with the tax preparation company.
The lender must approve the customers and will determine whether they are eligible for the loan, based on factors including the size of their expected refund and a valid ID.
If they are approved, customers typically get their advance on a prepaid debit card, and the money from their advance will be subtracted from their actual tax refund when it arrives.
Some words of caution
If you really need cash fast, a refund advance can be convenient and a good value, Clements said.
“This appeals mostly to people who are most likely using some of the refund to live off of, especially if they live month-to-month and need the cash,” he said. Many Americans use their refunds almost immediately to pay off healthcare bills.
Sometimes consumers turn to tax refund advances instead of payday loans, which can have high interest rates and be even worse for their financial futures, said Scott Astrada, the director of federal advocacy at the Center for Responsible Lending, a nonprofit based in Durham, N.C.
But lenders charge the tax preparation companies for each loan they issue, so it’s likely the companies are passing those fees on to consumers in some way, whether it’s in the cost of their tax preparation services, or additional fees, like “document processing fees,” the National Consumer Law Center says.
When you look at the fees compared to the total amount of the loan, it can actually work out to be an expensive way to borrow money in the short term, Astrada said.
Also, ask about any fees that may be associated with the prepaid debit card the advance would come on, Clements said. Some charge fees for services like making a withdrawal from an ATM.
You may be eligible for free tax prep
Another obvious drawback: The companies offering the advances require you to file with them, when many people are eligible to file for free, on IRS.gov, Coombes said. Filing in person with a tax-preparation company can cost $50 to $250, she said.
In fact, about 100 million Americans — particularly those with annual incomes of $66,000 or less — are eligible to file their taxes for free online, either directly with the IRS or through its partnerships with companies including Intuit INTU, +0.83% and H&R Block. But only about three million people each year take advantage of that. (See how to file for free and whether you might be eligible here.)
And although the IRS says refunds for people who file online can take up to 21 days, they typically arrive faster than that, Coombes said. So if you’re considering an advance because you need the money soon, you may be taking an unnecessary step.