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Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.
Updated September 28, 2021 Reviewed by Reviewed by Janet Berry-JohnsonJanet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting.
Part of the Series Federal Income Tax GuideTax Credits and Deductions
Retirement and Your Taxes
A tax refund anticipation loan is a loan offered by a third-party company against a taxpayer's expected income tax refund.
When individuals file their income tax forms for the year, they may be entitled to a tax refund. Tax refunds return the excess amount of income tax that a taxpayer has paid to the state or federal government during the past year, typically through withholding from a paycheck. In the U.S. today, the majority of taxpayers receive income tax refunds.
The U.S. Department of Treasury issues refunds in the form of government checks, U.S. savings bonds, or direct deposits to the taxpayer's bank account, depending on what the taxpayer has requested. Most refunds are issued within a few weeks after the taxpayer submits their tax return for the year to the Internal Revenue Service (IRS), the bureau that is responsible for collecting taxes. Electing the direct deposit option is generally the fastest method for a taxpayer to receive their refund.
A tax refund anticipation loan (RAL) is a way for a taxpayer to receive their money even more quickly. These loans are provided by third-party companies, not by the U.S. Treasury or the IRS. As a result, they are subject to the interest rates and fees set by the lender. Tax refund anticipation loans are most often offered by large tax preparation companies to taxpayers who are expecting refunds of a few thousand dollars or less.
With a tax refund anticipation loan, an individual can get quick access to a sum of money based on their expected tax refund. But because taxpayers will typically receive their refunds from the government within a few weeks of filing their tax return, borrowing that money usually makes little financial sense, unless the taxpayer is in immediate need of the funds.
Refund anticipation loans can be a very expensive form of borrowing, especially considering the short-term benefit they provide. If the lender charges interest, the quoted interest rate may seem small, generally around 3% to 5% of the refund amount. However, the total cost can be much higher when additional fees and charges are also factored in.
Many people view a tax refund as a chunk of money they've been forced to save or a nice income bonus. However, the bigger a taxpayer's refund is, the more money they have been lending tax-free to the government during the past year.
As an alternative, taxpayers might consider adjusting their federal and state tax withholding so that their employers withhold enough money from their paychecks to cover their likely tax obligations for the year, but not so much as to produce a large refund. Taxpayers who take this step and have the discipline to save that extra income throughout the year can put it aside for future use. With these extra savings at their disposal, taxpayers may not ever need to think about accessing a tax refund anticipation loan.
A tax refund anticipation loan is loan offered by a private third party financial services company to individuals that can prove that they are due a tax refund from the Internal Revenue Service based on their tax return. Such loans are usually modest in amount and are typically used for short term cash needs on the part of borrowers.
On the positive side a tax refund anticipation loan can be a welcome source of short term cash for those who are struggling to meet every day expenses or sudden, expected costs such as medical bills. Tax refund anticipation loans are generally easier to qualify for vs. loans from banks because they are secured by the tax refund itself, so they present less risk to lenders. Conversely, the down side of such loans are that they carry relatively high interest rates. Another downside of even being eligible for a sizable refund for which a loan could be made against means that the borrower had too much tax withheld from their paycheck - giving the government free use of your money over the tax year.
Credit cards can be used to cover short term cash needs, though carrying a balance can be expensive over time unless you are able to take advantage of introductory periods of 0% APR when first opening an account. Other types of loans, such as unsecured personal loans can also be an option with loan amounts up to $10,000 or more, often with reasonable interest rates based on good credit quality. Secured personal loans, such as title loans, are an alternative but come with extremely high interest rates that often result in borrowers getting trapped in debt or losing the title to their vehicle.
