Refund advance loans: how they work and what they cost

A refund advance is a loan against the refund you have not received yet, not an early refund. Whether it is worth taking depends on the fees, and on how many days it actually saves you.

What a refund advance loan is

The money comes from the tax preparation firm, or from a bank the firm works with, and it is normally sized as a share of the refund the preparer estimates from your return. You borrow it up front. When the IRS issues the refund, it goes to the preparer, the loan and the fees come out of it, and you receive what is left.

Nothing about that changes the return itself. The IRS still has to review and process it, so the estimate the advance was based on is the preparer's arithmetic rather than the government's answer. If the refund comes back smaller, or part of it goes to a past-due debt, you can still be responsible for the fees, and for the gap between the advance and the refund.

The other product: a refund transfer

The second thing a preparer may offer goes by refund anticipation check or refund transfer, and it is not an advance at all. It lets you pay the preparation fee out of the refund instead of paying it when the work is done. No money reaches you any sooner than the IRS sends it.

The charge for that convenience is usually a small flat fee in the tens of dollars, and it varies from vendor to vendor. When the refund arrives, the preparer takes the refund transfer fee, the filing fee and any other service fees out of it before paying you the rest.

The zero-cost versions and the priced ones

Firms are not alike here. Some offer advances with no fees and no interest, treating them as a reason to choose that office. Others charge fees, interest, or both. There is no rule of thumb that tells you which one you are being offered, and the only reliable answer is the loan agreement you are asked to sign.

Three things are worth looking for in that paperwork. A fee expressed as a share of the refund rather than a flat amount. A prepaid card the money is loaded onto, carrying its own schedule of charges for withdrawals, balance checks or inactivity. And a charge that appears only after the return has been prepared, when walking away feels expensive.

What it is actually buying you

Most people who file electronically, send in a complete and accurate return and choose direct deposit have their refund within 21 days. Measured against that, an advance buys days rather than months, and the fee is worth judging against the number of days it saves rather than against the size of the refund.

Two situations stretch the wait and change that arithmetic. A return claiming the earned income credit or the additional child tax credit is held longer than an ordinary one. So is a return the IRS pulls for review, which can add weeks with no warning. Refund delayed covers what actually stops a refund, and Where your refund comes from covers how the money is worked out in the first place.

The account the money moves through

The mechanic most people do not expect is the account. A temporary bank account is opened in your name by the tax preparation provider, the IRS sends the refund there, and the loan, the preparation charge and the fees are taken out of it before the balance is passed to you.

That is why the fee conversation has to happen before you sign rather than after. Once the refund lands in that account, the deductions are already agreed. Ask for the total in writing while you can still say no.

Questions to ask before you sign

• Is this a loan, or is it my refund arriving early?
• What is the fee, what is the interest rate, and what is the total I will pay?
• What happens if the refund is smaller than the estimate, or does not arrive at all?
• Is the money loaded onto a prepaid card, and what does that card charge me?
• Can I have all of it in writing before I sign anything?

The IRS asks preparers to explain every fee and every deduction taken from a refund, along with any interest owed. It also tells taxpayers to avoid a preparer who sets the fee as a percentage of the refund, or who offers to have any part of the refund deposited into the preparer's own account.

The cheaper alternatives

Filing electronically and choosing direct deposit is the fastest free route to the money, and it is available wherever you file. Several ways to file a federal return at no cost exist, and Free ways to file sets out who qualifies for each. If the reason for taking an advance is a bill that cannot wait, When you cannot pay in full covers the options on the other side of the ledger.