Posted by Income Taxes and Bookkeeping LLC

Pros and Cons of Tax Refund Loans

Pros and Cons of Tax Refund Loans

For many tax payers, their refund check is eagerly anticipated. However, there are options available that allow you to access your refund right away versus waiting for the government to issue it. These are tax refund loans, which are typically offered by your tax preparer by means of a third party lender.

Essentially, how it works is that you are approved based on the expectation that you will be getting a refund. You might be provided a pre-paid debit card loaded with the correct amount, paper check or a direct deposit into your account. When the IRS pays out your refund, it goes to your lender and thus the loan is paid off.

Pros of Tax Refund Loans

For those who find themselves in need of their refund right away, this provides a fairly simple way to gain access to those funds. They can then be used to pay outstanding expenses and other obligations right away. At the same time, you avoid any potential delays by the IRS in returning your refund. This could especially be true as budget cuts continue to reduce the manpower at the IRS and the number of tax returns continues to increase.

The dispersal time is also relatively short in comparison to many other funding options. Your refund is also usually much larger than a typical payday loan. Working with a tax professional, such as Income Tax and Bookkeeping, can also help you to make sure you have used all your appropriate deductions and credits.

Cons of the Tax Refund Loans

While it might be nice to get access right away to your funds, there are some other factors to consider. One is that like any other loan, you have to pay interest and fees. Considering that the loan will be out for a matter of weeks, these loans can be expensive. Additionally, you might find yourself paying fees for the pre-paid debit card or other delivery. In addition, you might be paying fees for both your federal and state return in order to receive them both at the same time.

When you add up the costs, you might find that you are paying the interest and fees equal to an expensive payday loan. Plus, your loan will already be reduced by your fees. Consequently, you will find yourself with a smaller return overall. If you opt to include both federal and state refunds, both of them will be smaller as a result.

However, there are risks involved. For example, if the IRS chooses to review your return and disallows some of your deductions, your return might be smaller than originally anticipated. As a result, you might not have enough to pay off the loan. This could translate into an additional financial obligation you were not planning for. The IRS might also withhold your tax refund for unpaid child support or other unpaid tax liabilities. Yet you are still going to be obligated to pay off the loan.

The costs are high for you, but are relatively small risk for your lender. After all, they already know your anticipated refund size and they are guaranteed that any refund you have available will be presented to them. Then they will simply bill you for the difference. This may also incur some additional fees.

Therefore, before you decide to take a tax refund loan, consider if your need is immediate. Perhaps you will find that you can afford to wait for the additional week or so that the IRS needs to process your return. You might also be able to get it faster by opting for a direct deposit into your checking account versus a paper check being cut by the IRS.

Also consider working with your tax professional to e-file your return. Income Tax and Bookkeeping, located in Winchester, IN, can work with you to e-file your return and minimize your wait for your refund. They can also assist you in making sure that you have used all of your available deductions and credits, thus maximizing any potential refund.

If you need funds immediately, consider other options available to you. After all, most tax refund loans are about paying for the convenience, but that does not make them financial sound decisions. Your tax professional at Income Tax and Bookkeeping can assist you to find the best filing option for you. Call or click on the link below to contact one of your local professionals at Income Tax and Bookkeeping in Winchester, IN.

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