If you sit down with your tax preparer this year, you might find out you have a refund coming your way in a couple of weeks, which is a nice surprise. You'll get a check or direct deposit for the amount you overpaid in taxes.
The next question from the tax preparer might be, "Do you want that refund now instead of later?"
This is a tempting proposition. But before you say yes, let us clue you into what this really means.
How Does It Work?
Tax preparers often offer what they call "instant" refunds or "rapid" refunds. That is when they give you the equivalent of your refund now, instead of having you wait for a check from the government in ten days.
But "rapid refund" isn't really an accurate name. In reality, they are working with a bank that offers you a short-term loan in anticipation of your getting a tax refund. In order to secure this refund/loan, you'll need to fill out some extra paperwork, including the loan application and a form releasing your refund to the people who make the loan. When the tax refund arrives, it goes straight to the lender to pay back what you owe.
Steep, Possibly Predatory Fees
Last year, the National Consumer Law Center estimated that the typical price for a typical refund anticipation loan (RAL) of $1,500 was a total of $61.22. This translates into an astonishingly high APR (annualized percentage rate, or what you would pay over a whole year for a loan) of 149%. And we thought a 25% credit card APR was high!
In fact, the fees and interest on these loans are high enough to be considered predatory by consumer advocates. And with such high fees at stake, the National Consumer Law Center cautions that some preparers might try to inflate your refund to make borrowing against it seem more appealing. Fortunately, RALs might be on their way out, because of a concerted effort by several government agencies, including the IRS, to make it extremely hard for the lenders to make these loans legally. But until then, it's good to know the facts.
Paying to Borrow Your Own Money
Something else to keep in mind is that your refund is not a special bonus; it’s your own money you’re getting back.
When you pay taxes to the government through your withholding, you are estimating how much you will owe in April. If you get a refund, that is the government giving you back the money you basically lent to Uncle Sam. So you are paying steep fees to borrow your own money for a couple of weeks—after lending it to Uncle Sam for free for several months. That's not the best way to manage your money.
Just a Few More Days
Finally, it generally doesn’t take that long for a refund check to arrive. Most people get their check in a few weeks. File your returns electronically and ask the IRS to deposit your refund directly into your bank account (there’s a place on the forms for your account number) and you’ll get it even faster.