If you have overpaid your taxes during the year, your tax return will reflect the amount of money the state or federal government owes you. To get access to your refund as quickly as possible, you may opt for refund anticipation loans or refund anticipation checks. Both methods save time but come with a hefty price tag.
Refund Anticipation Loan
A refund anticipation loan allows you to take out a short-term loan using your anticipated tax refund as collateral. The lender will charge you interest, as with any loan, and you may be charged service fees or other administrative fees. According to the Consumer Federation of America, these administrative fees can range from a low of $25 to several hundred dollars, and the annual percentage rate on such a loan can be as much as 1,300 percent.
Refund Anticipation Check
If you don't have a bank account of your own, but want to take advantage of the rapidity of a direct- deposited tax refund, you might consider a refund anticipation check. The lender, usually a bank associated with the commercial tax preparer, opens a temporary bank account into which your tax refund will be direct-deposited by the Internal Revenue Service. After the tax refund has been direct-deposited, the bank will issue you a check in the amount of the refund less any interest or other fees. The temporary account will then be closed. According to the Consumer Federation of America, fees and interest on refund anticipation checks can be in the hundreds of dollars.
Fringe Preparers
Some retailers offer to prepare your tax return in exchange for your promise to use the refund as a down payment on an item purchased from the retailer. The National Consumer Law Center and Consumer Federation of America labels these businesses "fringe preparers," and cautions against this practice. The people preparing your return may not be well trained or have received adequate education specific to tax returns. The fees and interest you pay for tax preparation and the anticipation loan or check increase the retailer's income. Carefully consider the qualifications of any tax preparer you are considering along with all associated fees.
Time Frame
Refund anticipation loans and refund anticipation checks do not significantly decrease the amount of time it takes for you to receive your refund. If you file ahead of the tax deadline, file electronically and have your refund directly deposited into your personal bank account, the IRS estimates you will receive your refund in two weeks or less. Consider whether the amount of time you will save is worth the amount of money you will spend for the loan. According to Carol Young, financial management specialist with Kansas State University Research and Extension, taking out a short term loan with a financial service provider will usually cost you less than a refund anticipation loan.
Warning
If there is an error in your tax return, the amount of your refund could be less than anticipated. You will still be expected to pay your refund anticipation loan in full when it is due; the due date on most refund anticipation loans is one to two weeks after the date the loan agreement was signed. Before you take out a loan against your tax refund, make sure you can afford to pay the loan back in full even if your refund is less than expected, and make sure you understand the full terms of the loan agreement.
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