Every year in January, you start to see and hear advertisements for tax refund loans. It seems like there are dozens of companies that can’t wait to get you your tax refund. It’s tempting to take them up on their offer as soon as your W2 forms arrive.
By law, employers must send out W2 forms by the end of January. Some employers give out W2 forms early so their employees can file early, too. Once you receive your W2, you have until sometime between April 15th and April 18th to submit your return. If you owe the IRS more money that you’ve already paid in, you’re more likely to postpone filing until closer to the deadline. On the other hand, if you’ll be one of the 97 million people getting a share of the $268.3 billion in refunds, you probably want your money as soon as possible. The lack of patience many of us have to get our money is the reason refund advance loans are so popular.
What Are Tax Refund Loans?
RALs are loans a company gives you based on your expected tax refund. Instead of waiting until the IRS takes the time needed to process your return and send you a check, a company advances you the money. Once your refund arrives, you pay the company back. It works much the same way as a payday advance. Both types of loans are considered ‘short-term’ and each one incurs an extremely high interest rate.
Like many of the financial opportunities we have in life, RALs aren’t a good idea. In fact, getting a loan this way can hurt your finances and cause a greater burden. Here’s why:
Reason #1: Paying Interest on Money That’s Yours
Businesses that give refund advance loans aren’t there to do you any favors. They’re there to make money, and they don’t have any qualms about charging you interest on your own money to do it. Many of them also add fees to the interest so that you end up paying a lot more back than you borrowed. The total you pay after a one- to four-month loan can easily surpass the amount of your refund. The interest alone might reach 400%! That’s not a number most of us would agree to if we realized how much an advance cost.
Reason #2: Your Debt Might Not End There
You probably think that making that much money off your tax refund is enough to thrill these lenders. But some are more dishonest than others. There’s a reason they make it so easy for you to get a loan. If you think your tax papers are the only credentials you need, think again. They aren’t worried about getting paid back for the loan. They already have access to your tax refund and they know how much you expect to get.
Any company that offers bad credit loans or lends you money without checking your credit is dangerous. They want to turn your loan into a problem instead of an advantage. When you end up owing more than your refund will cover, you need more money to pay the debt. Their plan is to get you caught up in a never-ending cycle of debt where you always owe them something more. Getting caught in this type of debt-trap is worse than never having gotten a refund at all.
Reason #3: There’s No Foolproof Way to Get a Refund Advance Loan
The advertisements for RALs may come from storefront lenders or professional tax services. You might expect those businesses that provide loans in their store to be predatory lenders. But getting a loan from a well-known tax service isn’t safe, either.
Just because you recognize their names doesn’t mean there’s no cost or risk involved. They can advertise their services as free because they don’t charge you a fee for the advance. They do, however, make getting your tax refund prepared with them a condition of the advance loan. Depending on the complexity of your taxes, this could cost you several hundred dollars. There’s a good chance the fees for tax preparation could take a big chunk out of your refund.
Reason #4: You Might Not Get Back As Much As You Think
Errors happen on tax refunds all the time. Even the most experienced accountant gets it wrong every once in a while. If you get a refund advance loan for the expected amount and end up getting less, you still have to repay the full amount of the loan. That includes tax returns filed by the same service that gave you the loan! They don’t have to pay for their mistakes; you do.
Reason #5: You Won’t Have to Wait That Long
A growing number of people are taking advantage of the option to e-file their taxes. It also simplifies the process when you have your refund direct deposited into your bank account. E-file with direct deposit is the fastest way to get your refund. The IRS processes refunds within 21 days of e-file acceptance. If there are no errors, that’s usually within 24 hours. You get the full benefit of your refund without the worries of owing more than you can pay when your loan arrives.
Reason #6: You Might Have to Sign Up for a Prepaid Debit Card Fee
Some services have you sign up for a prepaid debit card as a means to receive your refund. These, too, come with fees attached that can take you by surprise. Some of these companies also give you the option to have your loan deposited into your bank account. The deposit usually takes longer this way to make the pre-paid card more appealing.
Reason #7: You Have Better Alternatives
Think about your reasons for wanting your refund quickly. Do you have a financial emergency that just can’t wait? Or, do you want to splurge on something for fun and you just don’t want to wait? Most people fall into the second category. They have the same resources before their tax refund to take care of necessities. Even if you do have an unexpected expense, tax refund loans aren’t your only resort.
We all have financial emergencies that come up from time to time. When they do, consider what you have of value to help you get the money you need. You could have valuables setting around your house that you no longer want or need. If you don’t want to part with them, consider getting a pawn loan. You can get a loan for the money you need, pay minimal fees, and eliminate the worries of ending up in debt. When your refund arrives, you’ll have the money free and clear.
To get your refund as quickly as possible, file early. A lot of people wait until the last minute, flooding the IRS with returns. Have everything ready to go as soon as you receive your W2 on January 31st.
Join the 21st Century, if you haven’t already. File electronically and set up a bank account with direct deposit. This will help you get your refund faster and you can track it using the IRS ‘Where’s My Refund’ tool. If you are one of the few people who doesn’t have a bank account, consider opening one before you file. Even if you don’t like to use checks, talk to the bank about a debit account or even a savings account. Getting an account that offers you limited withdrawals and pays interest could help you save even more of your money.
So, What Does America Do With Their Tax Refunds?
Most Americans consider their tax refund a ‘windfall’; something a little extra that they get once each year. But how do most of them use it once they have the money in their pocket? The answer among refund recipients who were polled varied among the following:
1. Pay Down Debts
We all know that credit card debt is a problem in this country. Many people who get a hefty tax refund use it to help reduce their total debt. Experts often recommend paying off credit debt before other types because of the high interest rates. For some, using their tax refund is the only way to make a real difference in the overall amount they pay.
2. Put It in Savings
Even if you don’t have any urgent financial matters now; you could in the near future. Many people use their tax refund to build up their savings or to create an emergency fund. That way, the money’s there, collecting interest, when something does go wrong. Most experts recommend keeping enough to pay all of your bills for at least six months.
3. Make a Large Purchase
The fact is that many people don’t have enough left over from their paychecks to make significant purchases. These may be practical or frivolous buys including anything from a car to a washing machine, to a luxury vacation.
None of these ways of spending tax refunds really demand an early payment. In all cases, you can end up getting less to spend by getting a refund advance loan. A better approach might be to wait for the refund. Once you get it, spend a portion of it and put the rest into savings. That way, you get to enjoy the splurge without putting yourself into a potential bind.
Re-Consider Your Holding
If your only method of saving money is through your tax refund, you should reconsider your holding. If you’re struggling to get by all year and then getting several thousands of dollars back, there’s too much coming out of your paycheck. Use the IRS Withholding Calculator to determine the right amount for your income and circumstances. Imagine how much easier it would be to stay on track with a few hundred extra dollars each month instead of a lump sum at the end!
Another thing to keep in mind is that the IRS is getting the use of your money for an entire year interest-free. People love to hate the IRS, but they continue to give them the benefit of their hard-earned money for nothing in return. You don’t want to give too little and end up paying them at the end of the year. But don’t let them keep money that you could use now.
The best way to manage your money and keep from getting into a financial bind is by planning ahead. If you get a few hundred dollars extra each month, put a percentage into your savings account. Pay more than the minimum amount on your credit card bills and stop spending all your money on the interest. Get your taxes lined out before tax refund loans become an option. Once you have that security, you can handle normal emergencies much easier.
Meanwhile, when your car breaks down or you have a dental emergency, look for other sources of income to pay. You might be surprised to find out what treasures you have available to help you get the money you need. You can even get a pawn loan faster than you can get an anticipation loan on your income tax refund. The difference is that you won’t have to pay more than you can afford to get your own money.
Don’t wait another day to start preparing for next tax season. Talk to your employer about adjusting your holding. Start enjoying more of your money when you need it. If you don’t have a checking or savings account, open them now. Get into the habit of paying yourself a percentage out of every paycheck. You should check into different types of savings accounts to get the most interest on your money. You might even be able to reduce your tax obligation by starting a retirement account!
When you need money for those unexpected emergencies, give Mont de Piedad a call. We’re glad to talk to you about our pawn loans. We offer the best prices and generous terms to help you pay your loan back. There’s never any risk of hurting your credit and you get the money you need on the same day.