It sounds like a tempting proposition: Get your refund on the day you file your tax return. Some file preparers such as H&R Block will even issue you a prepaid credit card, which allows you to take your refund directly to your favorite store. But, tax preparers usually charge hefty fees for early tax refund payments, which are basically just short-term loans.
Combined loan fees and administration fees can range from $30 to $175 (and beyond). If you think that $30 doesn’t sound so bad, consider that paying $30 in order to get your $500 refund a month early means you’re paying 6% of your money to borrow it for one month, the equivalent to having an APR of 72%! (For comparison, even a 29% annual rate credit card would only charge you about $12 a month for $500. It's more than twice as good a deal as the early refund.)
This is a sucker deal. More than that, you'll have to repay that loan, even if your refund is less than you expected! Again: Do NOT go for a tax refund anticipation loan. It sounds like a good deal until you think about what you're actually getting for that $30—use of your money only one month earlier.
There are Better Ways to Get Your Refund Money Sooner Than Later
We know, we know: You needed that refund money yesterday. Here's what you should do instead:
1. File Early
It's obvious, but the earlier you file your tax return, the earlier you’ll get your money back. This is especially true since you’ll avoid the crush of just-at-deadline returns that could overload the system and cause delays. By the time you’re reading this, you should have received any necessary W-2 or 1099 forms from your employer and/or investments. (The deadline was January 31.)
Electronic beats paper in most cases, and there’s a doubly good reason for going online when filing tax return: The IRS says that it mails refund checks six weeks after receiving paper returns, but only three weeks after electronic returns.
If you opt for a refund via direct deposit, you'll save the time that it would have taken for the check to arrive by snail mail, and the time for it to clear.
If you keep meaning to save but are having trouble setting money aside, consider an option offered by the IRS. You can split your direct-deposit refund among two or three accounts. For instance, you can place half your refund in a savings account, and the other half in your checking account. That way, you can splurge and build for retirement at the same time.
Hope you enjoy a relaxing April 15!