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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

What to Know About Putting Money in Your Pocket Earlier With Tax Refund Loans

What to Know About Putting Money in Your Pocket Earlier With Tax Refund Loans

What are tax refund loans?

Most taxpayers know a lot about tax refunds. However, very few know about tax refund loans. If you have short-term cash needs and anticipate a tax refund, you can lay your hands on that cash sooner than it will arrive.

Generally, tax refund loans or a Refund anticipation loan (RAL) allows taxpayers to receive their money earlier than scheduled. In other words, with the RAL, you can put money into your pocket earlier. Available at certain times of the year, mostly when tax refunds are almost due, taxpayers who need their money sooner can take advantage of this window. 

Although the IRS or the government does not provide tax refund loans, you can benefit if you're expecting a considerable amount of tax refund from the government. Most times, you can access these loans from private tax companies and other financial institutions, which also would set the interest rates. Although tax refunds often come with 0% APR, you still need to pay some charges. 


Who qualifies for these loans?

You can't access these loans if you're not expecting refunds from the government, and you are typically only eligible a few weeks before the refunds are due. This seems not to make financial sense. But the idea is not about accessing "loans" but about getting money into your pocket quicker. At some other times, you may need cash urgently. At such times, the refund of loans comes in handy. Moreover, some financial institutions will charge you nothing to access your money earlier.

If you consider the disadvantages, mainly because they are incredibly short-term, with interests and additional charges, you may not want to go for this kind of loan. However, you may find yourself in need of money and the only window that is viable at that time is the Refund loan. You need to know how to benefit from it. 


How to benefit from tax refund loans

When you show interest to access a refund anticipation loan, you can get the check (refund anticipation check RAC); the financial institution granting access to the money would need an assurance that you'll pay from your refund when it is paid. That way, you can access your refunds earlier than scheduled. When your refunds are to be paid, it simply goes to the financial institution to clear your debts.

Before you access the money, the issuer needs to be sure that you are qualified for returns and, most of the time, would only loan you an amount not exceeding your anticipated refunds. That means they would review your returns to prove your eligibility. 

Once your eligibility is confirmed, you will get the money, which may be deposited in your account or any other preferred method. In contrast, the money is transferred automatically into their account once your refunds are paid. You can only get loans not exceeding what your anticipated refunds are.


Where to access refund loans?

As said, several financial institutions offer this service. However, mainly, primary tax preparation services provide these loans, although they all have different customer requirements. Once approved, you'll get the money immediately. 


When to access refund loans?

It may not seem to make a lot of financial sense to access your money earlier than scheduled if you don't need it. This is because it would most likely come with additional charges. Moreover, there are instances when the refunds are smaller than anticipated. But you should take advantage of the RAL when you need the money urgently and waiting for the returns may be too costly, and the cost if accessing is negligible. 

It does not harm if you can get your money in your pocket earlier at little cost. But if you don't have an urgent need for it, you may wait for the returns to arrive at the expected time.


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Jim McClaflin, EA, NTPI Fellow, CTRC
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