For Americans in need of quick access to cash, a tax refund loan might be the right move.
Nearly 22 million out of 138 million taxpayers used multiple types of tax refund loans or advances in 2024, according to the latest report from the federal government.
Tax refund loans offer a convenient way for taxpayers to access their money weeks ahead of when it would normally arrive in their bank account. However, the loans come with drawbacks that are important to understand before signing up for one.
What is a tax refund loan?
This is a type of loan that a financial institution, such as a tax preparation service, offers you based on the estimated amount of your tax refund. If you’re approved for a tax refund loan, the lender may be able to give you the funds on the same day you apply.
While other loans require monthly payments over time, tax refund loans are different. Instead of incrementally paying them back, the lender uses your tax refund to pay back your loan, minus any interest or fees.
Refunds often go directly to the lender, and the loan is automatically paid, in many cases, according to the Consumer Financial Protection Bureau.
If you have refund money leftover after the loan is paid, you get the extra, the bureau noted. The opposite is true, too. If the refund is smaller than the loan amount, then the borrower is responsible for paying the difference.
In general, these types of lenders offer loans that are less than the anticipated tax refund amount. For example, a lender may cap their loans at $4,000 but require you to have a refund of at least $6,000 to get that amount.
Because of this, it’s important to check your return for errors, as simple mistakes can lead to a rejected return and lengthen the funding process.
Generally speaking, your federal return has to be accepted by the IRS before you can get your refund loan cash.
How to get a tax refund loan
Taxpayers can get a tax refund loan by applying with a tax prep service, in most cases. Just like shopping around for rates from different lenders when you need a personal loan, shopping around for a tax refund loan can help you identify lenders offering the best deal.
For example, one lender might charge 20 percent interest for a loan, while another lender might offer zero-interest loans for those who qualify. The two interest rates in this example are the difference between paying $200 and zero dollars on a $1,000 tax refund.
Once you narrow down the lenders, check their eligibility requirements. Besides interest, there could be other charges in the fine print, said certified public accountant Armine Alajian, an entrepreneur and startup tax expert at Los Angeles-based accounting firm Alajian Group, Inc.
“It may seem tedious, but you must always read everything,” Alajian told The Independent in an email. “You need to know what the interest rate is, as well as the processing fees. It should also tell you what happens if the refund does happen to be reduced or delayed. And you need to determine whether you’re on the hook for repaying the loan if you don’t get a refund from the IRS.”
Factors to look for include minimum and maximum loan amounts; loan maximums based on a percentage of your estimated refund; and whether the lender lets you choose your loan value or pick from a list of amount options.
If you don’t have time to conduct a full search, Alajian says word-of-mouth suggestions can be invaluable.
“I always encourage people to only work with established tax professionals and lenders [who] have come recommended to them,” she said.
“In today’s day and age, we should definitely be looking through online reviews and client testimonials. Be cautious of pop-up or online-only offers that typically lack transparency.”
How to apply
Tax refund lenders typically require you to file your taxes with them and fill out a loan application during the process. Typically, applying for a tax refund loan won’t impact your credit score.
In many cases, the lender can approve a loan application in a few minutes and fund your loan the same day. However, errors in a return could delay the process, and those with existing tax debt won’t be eligible since the IRS typically applies refunds to the taxpayer’s existing balance.