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Avoid Tax Refund Anticipation Loans

Instant Tax Refunds Are Costly

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Have you filed your taxes and discovered that you will be receiving a refund? If you’re like most people, you probably want to get your hands on that money as soon as possible, but this could be costly. Many tax preparers offer “instant” tax refunds, otherwise known as a tax refund anticipation loan that can give you cash on the spot or within a day or two.

How Refund Anticipation Loans Work

When you file your taxes, it can take a few weeks for the IRS to issue a check or send your direct deposit, so a tax refund anticipation loan is a way to get your refund without waiting. These are short-term loans that are issued by a bank and are secured by your expected refund.

Since these are loans, interest and fees do apply. The problem is that the fees are generally not clear as they are automatically deducted from the loan amount and not presented in terms consumers are familiar with. In some cases, if you calculate the fees on an anticipation loan, it may be the equivalent of over 200% APR.

It Pays to Wait

While it would be nice to get your hard-earned money back in your pocket as quickly as possible, it is to your advantage if you can wait for your refund. If you file electronically and request direct deposit, you should expect your refund in as little as two weeks. Those few weeks could save you a few hundred dollars in fees that you would have otherwise spent on a refund anticipation loan.

Alternatives to Consider

While credit cards shouldn’t be a short-term financial fix, it is important to note that even the worst credit card is going to charge you less in interest than the best refund anticipation loan. Ideally, you don’t want to use credit cards for this purpose, but it could be an acceptable option.

If you rely on the extra money provided by your tax refund, you may want to consider adjusting your withholding on your W-4. With the right exemptions, you can put more money in your pocket every paycheck so that you don’t have a big refund just once a year.

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