What it means
When you file a return that shows a refund, the tax authority may take a few weeks to pay it. A refund anticipation loan bridges that gap by giving you a part of the expected refund immediately, usually through a tax preparer working with a bank or lender.
The approval decision is usually made within hours. The loan is repaid automatically.
Your refund is directed to the lender, who deducts the loan amount and fees and sends you any balance, so you never make a separate payment. The important point is the cost.
Because the loan lasts only days or a few weeks, a flat fee that looks small can translate into a very high annual percentage rate. Add preparer fees and bank charges, and the true cost can be much higher still.
There is also a risk that the refund is smaller than expected or delayed. If the authority adjusts the refund, for example because of an error or an offset against other debts, the borrower may still owe the lender the difference.
Because of these concerns, regulators and consumer groups have criticised the product, and in some markets it has been restricted or withdrawn. Cheaper alternatives are generally available, including electronic filing with direct deposit, which often delivers the refund within a couple of weeks.
The nuance is that a loan is rarely the only way to get quick access to your own money. Checking whether a faster filing method, a low-cost advance or a short delay can solve the problem is usually worth the effort.
In practice
Real-world examples.
Example
A delivery driver files her return in January and expects a $3,200 refund. Her car needs urgent repairs, so she takes a loan of $2,500 from a tax preparer's partner bank. The fee is deducted from the refund when it arrives, and she gets the repair done the same week.
Example
A part-time worker takes out a loan against a $1,400 refund, but the authority holds the refund for review and then reduces it to $900. The lender is repaid first from what arrives, and the worker is asked to pay the shortfall. He ends up worse off than if he had waited.
Example
A small business owner who also files a personal return considers a loan against a refund of $5,000. She compares the fee with the cost of a short bank overdraft and decides the overdraft is cheaper. She files electronically with direct deposit and receives the refund in two weeks.
Formula
Calculation
Effective annual rate = (Fee / Loan amount) x (365 / Days outstanding)
Suppose a taxpayer borrows $2,000 against an expected refund and pays a $50 fee. The refund arrives after 10 days, so the loan is outstanding for 10 days. Fee as a share of the loan = 50 / 2,000 = 0.025, or 2.5%. Annualised, 0.025 x (365 / 10) = 0.025 x 36.5 = 0.9125, which is an effective rate of about 91%.Case study
Seen in the real world.
Brightpath Tax Services is an illustrative, fictional preparer that offers refund anticipation loans to its clients. One winter, a client named Elena asked for an advance of $1,800 against a refund she expected to be $2,400. She needed the money for a rent deposit.
The preparer explained the fee of $45 plus a processing charge of $35. The client calculated that she was paying $80 to borrow $1,800 for about eight days, which annualised to a rate of more than 200%.
In this illustrative story, Elena decided to file electronically and wait. Her refund arrived in nine days, and she saved the $80. Brightpath later added a plain-English cost comparison sheet to its client folder after several clients raised the same concern.
Watch out
Common mistakes.
- Judging the loan by its flat fee, when the very short term makes the annualised cost very high.
- Assuming the refund is guaranteed, when it can be reduced or delayed, leaving a balance owed to the lender.
- Forgetting extra charges for preparation, processing and bank accounts, which add to the true cost.
Questions
People also ask.
Is a refund anticipation loan the same as a refund anticipation cheque?
No, a loan advances money you must repay from the refund, while a cheque is a way of receiving the refund after fees are taken from it.
Can I be refused a loan even if I expect a refund?
Yes, lenders can decline, for example if your return is complex or they think the refund may be offset by other debts.
What are the alternatives?
You can file electronically with direct deposit, use a low-cost credit option, or ask your employer or bank for a short advance.
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