Tax day will come a little later this year, but is still just around the corner. If you’re expecting a refund from the IRS, you may be tempted by a Refund Anticipation Loan (RAL), or Tax Refund Loan. These loans put your refund in your pocket sooner – but come at a hefty price. Some companies will charge as much as 25% of your anticipated refund amount to loan you money for what may turn out to be as few as 7 days. Below, reasons you might think you “need” a refund anticipation loan, and 5 things to try instead.
Rationalizing Refund Loans
You might find a refund loan looking good if…
- You’re late on bills. You might be planning to use your refund on bills, and think it’s best to make that big payment sooner than later. When bills (and associated interest) are piling up, you can rack up several dollars per day in fees and interest. So getting a refund loan and paying now will help – right? Wrong. The fees you’ll pay for that loan will likely exceed the fees or interest you’ll pay on your bills. So resist the urge, and just wait until your real refund arrives.
- You have a big expense/bill coming up. Similar to the above, you might want to secure your refund now in preparation for an expense that you believe will come before your refund. If you wait for your refund, you might incur late fees and/or interest. But just like above, it’s probably still worth it to wait. If you have a good history with whoever you will owe money to, you can try negotiating to get the payment due date pushed a little later, and save interest and fees altogether.
- You want to take advantage of tax refund specials. Companies that sell big-ticket items like cars and furniture often roll out deals around this time. You might think that your refund will come after the biggest deals are finished. But unless you can save enough to counteract the fees you’ll pay for a refund loan, the sales aren’t a deal at all.
The bottom line? The hefty fees you’ll pay for a refund anticipation loan cancel out nearly every reason for taking one in the first place. It would take a massive amount of fees/interest/discounts to surpass the fees and interest you’ll pay on the loan.
5 Refund Loan alternatives
Instead of taking out a refund loan when you file your return, try one of these options instead:
- File electronically: Filing electronically means your tax return will be received, processed, and accepted much faster than a traditional mailed paper return. This means your refund can also be processed more quickly.
- Select direct deposit: In addition to filing electronically, choosing to receive your refund via direct deposit to your bank acocunt will help shorten the time it takes to get your refund in your hands. Waiting for a mailed check means waiting for the IRS to process your return, authorize the refund, cut and mail the check. Then you have to wait for it to arrive and take it to the bank before you can do anything with it. Direct-deposited refunds can arrive as few as 10 days after filing for those who file electronically and submit a return with no issues.
- Tap other funds: If you really need to make a payment or buy an item before your refund arrives, try to be creative with your funds. Maybe you can use a credit card and pay it off before the due date, thus avoiding interest. Maybe you can use the money you’ve been saving for your dream vacation, kids’ summer camp, or other large expense. This is basically taking a loan from yourself – but as long as you really do replace the money when your refund arrives, it’s a whole lot cheaper and easier than a refund anticipation loan from another source.
- Use Layaway: Those big sales you’ve been seeing may end before your refund arrives. But you might be able to lock in the price now by using layaway. You may have to pay a small fee for the privilege, but it’s guaranteed to be less than the fee you’ll pay for a refund loan.
- Be patient: It might go without saying, but one alternative to any of the above is simply to wait it out. Getting a refund now means you went all of 2011 AND nearly 4.5 months into 2012 without that money. If you’ve waited this long to file your taxes, you probably don’t need the money.
A Bonus Tip: Plan Ahead
Next year, refund anticipation loans won’t be offered. But you can also plan ahead and avoid this situation altogether by adjusting your withholding using Form W-4 to prevent a refund at all. You can use the 2012 tax brackets to help you plan. And if all else fails, commit to filing earlier next year – you can get your refund a full eight to ten weeks sooner if you file in February!