Tax Refund Advances Sound Great, but Experts Don't Recommend Them. Here's Why

The IRS begins accepting tax returns on Jan. 29, but if you're hoping to get your refund earlier, you might be considering applying for a tax refund advance. 

A tax refund advance is a short-term loan that can give you access to your refund even sooner. While getting your hands on your money sooner can be tempting, financial experts warn against them.

"While tax refund advances may seem appealing when finances are tight, I only recommend taking them out if necessary," said Dana Ronald, president of the Tax Crisis Institute. "They often come with high interest rates and fees, which can add to the overall cost of borrowing."

This can result in unexpected debt and financial strain, which can put you in a tight spot. Before taking out a tax refund advance, learn how they work, how much they cost and alternatives to explore.

What are tax refund advances and how do they work?

A tax refund advance (also called a refund anticipation loan) is a short-term loan that offers you a portion of your expected tax refund amount weeks or months ahead of your actual refund. The premise may seem compelling, especially if you're still catching up on bills from the holidays. You can typically borrow between $200 and $4,000 between December and February with a tax refund advance.

"Tax refund advances are not free money and should be cautiously approached," said Ronald. "It's always best to carefully consider all potential risks and alternative options before deciding."

You'll apply for a tax refund advance on a tax preparation company's website. You may need to provide proof of income, your W-2 (if available) and other financial records.

Tax refund advance loans typically don't have the same credit score requirements as other loans do, and the amount you're approved for may depend on your expected refund amount. So, even if a service advertises $3,000 advances, it doesn't mean you'll qualify to receive this full amount.

You typically receive your funds within a few business days, and sometimes as fast as the same day. If you're required to file your taxes with a tax preparation company, the amount owed may be automatically taken from your refund once the IRS submits it. Otherwise, you'll need to repay your loan by the agreed-upon due date.

How much do tax refund advances cost?

Having extra funds at your disposal could be helpful, but a high-interest tax refund advance is generally not the way to go. Interest for this type of loan is high, with annual percentage rates upward of 35%. For context, average credit card APRs hover around 20%, while personal loan APRs are around 11.56%. 

Some tax filing services don't charge interest for this service as long as you agree to file your taxes with them, but that could mean you end up paying a fee to file your taxes. There are also other fees you should look out for, even if the loan has a 0% APR.

What are the risks of taking out a tax refund advance?

There are a few reasons why you should be wary of tax refund advance loans. 

"One of the biggest risks is that if your tax refund ends up being less than the amount you borrowed," said Ronald. Since these loans are based on an expected refund, there's always the possibility that your refund is smaller than expected. In this case, you'll be responsible for paying the full balance. 

Secondly, a refund advance may cost you, even if it's advertised as 0% APR. There could be hidden fees, including a requirement to pay for tax filing services, which can be pricey. Plus, some services may charge high interest rates, making this a more expensive type of loan.

Note: Be careful of payday lenders that may advertise similar loans during this time of year. These companies often have extraordinarily high interest rates and fees. In some states, payday loan rates can average as high as 400% (yes, you read that correctly). Personal finance experts recommend avoiding payday loans at all costs.

Where to get a tax refund advance in 2024

Most of the large tax preparation companies offer some sort of tax refund advance, although the terms, conditions, qualifications and amounts vary from company to company. Here's a quick look at the products offered by some of the larger tax preparation firms:

• Jackson Hewitt offers two products: an Early Refund Advance, which you can get with just your pay stubs and comes with an APR as high as 35.53%, and a No Fee Refund Advance, which is a no-fee, 0% APR loan available at most Jackson Hewitt locations.
• H&R Block also has two options. Its refund anticipation loan is no longer available for the 2024 tax season, but it is still offering a 0% APR refund advance loan for up to $3,500 through Feb. 29.
• TurboTax offers a refund advance of up to $4,000 with no loan fees and a 0% APR until Feb. 15 (or when funds run out) if you meet certain eligibility requirements.

Alternatives to tax refund advances

If you can, wait until your tax refund comes through in 2024. This can prevent you from receiving a larger loan than you can afford to pay back when your refund hits. To get your refund as quickly as possible, the IRS recommends filing online early in the tax season and opting for direct deposit delivery.

If you need money faster, consider tapping into emergency savings. Experts recommend building an emergency fund with one to three months of expenses. But if you are still working on getting your emergency fund set up, there are other, more affordable options to consider.

"I recommend exploring other options, such as setting up a payment plan with the IRS or utilizing low-interest personal loans from banks or credit unions," said Ronald.

If you need your refund money faster to cover a surprise expense or necessity, consider a personal loan or 0% APR credit card. Just make sure you can make monthly payments to minimize interest, late fees and other penalties.

For more tax advice, find out the key dates you need to know when filing your taxes this year and learn about the homeowner's credits and deductions you may be able to claim.