Taxes

What is a tax refund advance loan, and how does it work?

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A tax refund advance, also known as a refund advance loan or a return anticipation loan, does not allow you to get your IRS refund early. Instead, you might borrow money against a portion of your anticipated tax refund. Tax return advance loans are short-term loans that last for a month or less, or until your complete refund is sent to your tax preparer by the IRS.

Refund advance loans are most commonly offered by tax preparation and filing businesses, but they can also be found at car and boat businesses, furnishings and retail chains, and other retailers.

What is the procedure for obtaining a tax refund advance loan? 

While each lender’s application process is different, it usually goes something like this: 

  • Decide on a tax preparer. You choose a tax preparation service — either in person or online — and agree to have the service prepare and e-file your tax return for you. Inform the preparer that you would like to apply for a return advance loan. 
  • Fill out an application for a tax refund advance loan. Once your tax return is complete, the provider (or its partner lender) examines it, taking into account your income, credit, and refund amount before deciding whether or not to approve your loan.
  • Get the money from the loan. If your loan application is granted, the tax preparation company or lender will send you a paper check, a prepaid card, or a direct deposit into your bank account. In addition, your tax preparer opens a temporary bank account in your name and directs the IRS to deposit your refund there.

You may observe that you must first choose a tax preparer and prepare your tax return before learning whether or not you are authorized for the loan and how much you can borrow. This makes it difficult, if not impossible, to shop around for the best tax preparation rates and credit terms.

What is the procedure for repaying the loan? 

Your tax refund advance is repaid from your refund. Your tax refund is put into a temporary bank account in your name, from which the tax preparer or lender takes a cut of the loan balance, tax prep fee, and any other relevant fees and interest charges before returning the remainder to you. You may receive the rest of your tax return via check, prepaid card, or bank account transfer, depending on the lender. 

This is why tax refund advance loans are so dangerous. The loan is based on the amount you expect to receive from the IRS, and your actual return may be less than you anticipated.

Why should you think about taking out a tax refund advance loan? 

Taxpayers may benefit from a tax return advance loan in the following circumstances: 

You anticipate a sizable refund. 

You don’t owe back taxes, child support, or have student loans that have gone into default. 

You require the funds immediately to address immediate expenses. 

You engage with a tax preparer that does not charge interest or fees for a refund anticipation loan (RAL). 

If you owe money on rent, electricity, or other payments, for example, a RAL could help you save money and avoid eviction, utility shut off, or further costs and penalties.

If you wouldn’t need the money right away, though, you can save money by using a free tax filing option, filing your return electronically, and having your refund sent directly into your bank account. The IRS claims that it processes more than 90% of tax refunds in fewer than 21 days and that using e-file and direct deposit is the quickest way to get your money.

Tax Refund Advance Loans in one kind of available midtown loans

These are certain points you need to know about Tax Refund Advance Loans. 

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