Tax refund advance loans: What you need to know

A tax refund advance is a short-term loan that you repay with your tax refund. The amount you can borrow depends on your expected refund and other factors. (Shutterstock)

Your tax return isn’t due until April, but if you’re expecting a tax refund, you might not want to wait that long. You may be able to get some of that cash sooner from a tax refund advance loan.

A tax refund advance is a short-term loan offered by either the company that prepares your tax return or a third-party lender. This article will help you figure out if a tax refund advance loan is right for you.

• What’s a tax refund advance loan?
• How much can you get with a tax refund advance loan?
• Are you eligible for a tax refund advance loan?
• How much does a tax refund advance loan cost?
• How do you apply for a tax refund advance loan?
• How is the loan repaid?
• Why should you consider a tax refund advance loan?
• What are alternatives to a tax refund advance loan?

What’s a tax refund advance loan?

A tax refund advance, also known as a refund advance loan (RAL) or refund anticipation loan, doesn’t actually give you early access to your IRS refund. Instead, it allows you to take out a loan against a portion of your expected tax refund. Tax refund advance loans are short-term loans — usually for a month or less — or until the IRS sends your full refund to your tax preparer.

Businesses that prepare and file tax returns are the most common places to find refund advance loans, but you might also find them advertised at car or boat dealerships, furniture and electronics stores, and other retailers. The application deadline for these loans is typically in late February.

How much can you get with a tax refund advance loan?

The amount you can borrow with a refund advance loan depends on the company offering the loan and your expected federal income tax refund. For example, H&R Block and Jackson Hewitt provide tax refund advances of up to $3,500, while TurboTax loans up to $4,000 and Liberty Tax offers refund advance loans of up to $6,250.

But don’t expect to be able to borrow the full amount if your anticipated refund is smaller — most refund advance lenders will only lend you roughly 25% to 50% of your expected tax refund.

For example, with TurboTax, if your expected federal refund amount is between $500 and $999, your maximum refund advance is $250. For refunds of $1,000 to $1,499, you can borrow up to $500, and so on. To get the full $4,000 loan amount, your expected federal tax refund would have to be $8,000 or more.

If your refund won’t be large enough to qualify you for a loan amount to meet your needs, you may consider a personal loan instead. Check out Credible to compare personal loan rates quickly and easily.

When will you get your loan funds?

How quickly you can get your tax refund advance loan funds after you’re approved depends on the lender, but many companies advertise that you can get funds the same day that you apply.

Are you eligible for a tax refund advance loan?

Not everyone qualifies for a tax refund advance loan. While the eligibility requirements vary from company to company, you typically must:

• Be 18 years of age or older
• Agree to file your federal income tax return electronically
• Have a valid U.S. address
• Have income from a Form W-2, 1099-R, Schedule C, or Schedule C-EZ

Lenders may also consider your payment history with the IRS and whether you have any defaulted federal student loans, delinquent child support, tax liens, or other situations that could cause the IRS to withhold all or part of your tax refund.

Some companies allow you to get prequalified online so you can get a better idea of whether you’ll be approved, and how much you might be allowed to borrow. To prequalify, you’ll need to provide your Social Security number, last year’s refund amount, and your contact information. Just keep in mind that a prequalification isn’t a guarantee that your loan will be approved. You’ll still need to submit a formal loan application when you file your return.

How much does a tax refund advance loan cost?

The cost of a refund advance loan varies by lender. Many national tax preparation chains, including H&R Block and TurboTax, advertise refund advance loans with no finance charges, no loan fees, and a 0% APR. But you do have to agree to pay a fee to have your tax return prepared and e-filed. That fee varies by company and may depend on how complicated your tax return is.

Other companies charge for tax refund advance loans. For example, Jackson Hewitt doesn’t charge a loan fee, but its Early Refund Advance Loans have an annual percentage rate of 35.9% for 2022. Similarly, Liberty Tax charges an APR of 35.99%. 

Fees for a refund advance loan typically range from $30 to $50, according to the Consumer Financial Protection Bureau. Most companies offering these loans will deduct your tax preparation charges, loan fees, and interest from your refund. You also need to watch for hidden fees. For example, if your loan funds are loaded onto a prepaid debit card, there may be transaction fees for using the card.

Taking out a personal loan is another option. Credible makes it easy to compare personal loan rates quickly and easily.

How do you apply for a tax refund advance loan?

While the exact process of applying for an RAL varies by lender, it usually looks something like this:

1. Select a tax preparer. You select a tax preparation provider — either by visiting a storefront near you or online — and agree to have the provider prepare and e-file your tax return. Let the preparer know you want to apply for a refund advance loan.
2. Apply for a tax refund advance loan. Once your return is complete, the provider (or its partner lender) reviews your tax return, considers your income, credit, and refund amount, and decides whether to approve your loan.
3. Receive the loan funds. If your loan application is approved, the tax preparation provider or lender issues your loan via paper check (which may involve an additional fee), a prepaid card, or a transfer to your regular bank account. The tax preparer also sets up a temporary bank account in your name and instructs the IRS to deposit your refund into that account.

You may notice that you have to select your tax preparer and have your tax return prepared prior to finding out whether you’re approved for the loan and how much you can borrow. This makes shopping around for the best tax preparation fees and loan terms difficult, if not impossible.

How is the loan repaid?

You repay your tax refund advance out of your tax refund. The tax preparer or lender has your tax refund deposited into a temporary bank account in your name, then deducts the loan balance, tax preparation fee, and any other applicable fees and interest charges from the account before turning the balance over to you. Depending on the lender, you may receive the balance of your tax refund via check, prepaid card, or transfer to your bank account.

This is what makes tax refund advance loans risky. The loan is based on how much you anticipate getting back from the IRS, and your actual refund amount might be lower than you expected.

For example, if you owe back taxes to the IRS or your state’s taxing authority, back child support, or have defaulted on federal student loans, the Treasury Department can seize all or part of your refund to pay that outstanding debt. It’s also possible that a mistake on your tax return could impact the amount of your return. 

If your actual tax refund is less than the loan balance, tax preparation fees, and other fees and interest associated with the RAL, you could wind up owing money to the lender rather than getting a refund.

Why should you consider a tax refund advance loan?

A tax refund advance loan can be helpful for taxpayers in the following situations:

• You expect a substantial refund.
• You don’t owe back taxes, child support, or have defaulted student loans.
• You need the money right away to cover immediate expenses.
• You work with a tax preparer that doesn’t charge interest or fees for an RAL.

For example, if you have unpaid rent, utilities, or other bills, an RAL could help you save money and avoid eviction, having your utilities shut off, or being charged additional fees and penalties.

But if you don’t need the money immediately, you could save money by taking advantage of a free tax filing option, e-filing your return, and having your refund deposited directly into your bank account. The IRS says it issues more than 90% of tax refunds in less than 21 days and that using e-file and direct deposit is the fastest way to receive your refund.

If your adjusted gross income is $73,000 or less, you may qualify for free guided tax preparation via IRS Free File. You may also be able to get free tax preparation assistance from trained volunteers via the IRS’s Volunteer Income Tax Assistance (VITA) or Tax Counseling for the Elderly (TCE) programs. Visit the VITA/TCE Locator page to find a location near you and make an appointment.

What are alternatives to a tax refund advance loan?

A refund advance loan isn’t your only option if you need money fast. Consider these alternatives:

• Personal loan — If you need more money than you can get with an RAL, it might make sense to take out a personal loan. Shop around online to ensure you’re getting the best rate and terms.
• Low-interest credit card — Depending on your credit, you may be able to qualify for a credit card with a low or 0% introductory APR. If you can pay off the balance before the promotional period ends, you won’t pay any interest.
• Peer-to-peer loan — Peer-to-peer loans are similar to personal loans, but they’re funded by individual investors rather than financial institutions. Those individuals may be willing to lend to people who aren’t able to qualify for a traditional bank loan.

If you decide to use a personal loan instead of an RAL, visit Credible to compare personal loan rates from various lenders in minutes.