Cheap, Fast Tax Refund Loan Alternatives

Just discovered you'll be getting a tax refund? Don't let your enthusiasm to spend that unexpected money get the better of you.

Thanks to today's technology, there's really no need to pay extra for a refund anticipation loan, or RAL, just to get your hands on your tax money a tiny bit sooner. If instant cash is more a desire than a need when considering a quick refund, consider these alternatives:

Go electronic. Abandon the traditional paper return sent via the U.S. mail and file from your computer. You'll get the money almost as fast as you would with a refund anticipation loan and get it without paying any loan fees or interest. In fact, you may not need to pay for anything. An Internal Revenue Service partnership with tax preparers and software companies offers free online tax preparation and e-filing to some taxpayers. For the 2011 filing season, the Free File program, which kicks off Jan. 17, will be available. Last year, the income cutoff was $57,000, regardless of filing status. And inflation adjustment should increase that amount slightly.

For the last few years, the IRS also expanded the online program to include taxpayers who make more money. Via the Free File Fillable Tax Form option, anyone, regardless of income, can enter their tax data onto online forms and then file them for free directly with the IRS. This is not a tax software program, but simply blank forms you can use via computer, and file directly, rather than filling them out by hand.

The IRS says that any e-filing option you use will get you your tax refund much more quickly than if you mailed a paper return. Whereas paper filers could wait up to eight weeks for their refunds, most electronic filers can expect their tax checks to show up in their mailboxes in half that time or less. The agency also points out that the error rate is less than 1% for electronic filers.

Direct deposit. Electronic filers who opt for a refund via direct deposit do even better. The IRS says the money generally shows up in taxpayer bank accounts in 10 to 14 days. Even if you file the old-fashioned paper way, having your refund deposited directly into a bank account cuts the time you have to wait for your tax cash. Plus, it's added protection against lost or stolen refund checks sent via the mail.

Use store financing. If you want your refund to finance a must-have new appliance, store interest rates usually will be better than a refund anticipation loan. Many stores offer free financing for limited time periods. By then, the refund should have arrived and you can use it to pay off the store credit -- and pay no interest at all.

Impatience Usually Wins

But ultimately, a refund anticipation loan is a personal preference, not a fiscal issue for taxpayers.

"Theoretically, with electronic filing and quicker turnaround on refunds, the need for tax anticipation loans has become obsolete," says John L. Stancil, CPA and professor of accounting at Florida Southern College in Lakeland. "However, my observation is that they appear to actually be on the increase, as people become more and more impatient to get their refund.

"One sample I saw from a major company who provides these loans through tax preparers disclosed an annual percentage rate of 264% on the loan," he says. "All year long, taxpayers have made the government an interest-free loan, and now they are paying 264% to get their own money back a few days quicker."

Companies that offer refund loans are well aware of such impatience, and that's why the loans survive even as electronic filing increases.

Companies promoting the loans promise that taxpayers can receive money even more quickly than the IRS' two-week timetable for a tax refund to be directly deposited into a bank account or three or more weeks for a mailed IRS refund check.

That pitch definitely appeals to those who value speed over cost, such as a person who stands impatiently in front of the microwave wondering when dinner will be done.

Recently, larger tax-preparation companies have been offering these impatient customers RALs on an easy-to-use prepaid debit card. The ease of a debit card coupled with the draw of an "instant refund" tempts customers looking for a speedy return. With all the pluses of these promises, many customers fail to see all the charges incurred for their impatience. These charges include tax preparer fees, account fees and finance charges, as well as the fees of the card itself, which include charges for ATM withdrawals, balance inquiries and denials to speak with a live customer service representative. It's a double-whammy for many expecting to see every cent of their refund, only a few days sooner.

But if you can squelch your refund appetite for just a few days, then you -- and your bank account -- will be better off.