Last-minute filer? Getting an advance on your tax refund could get your cash within minutes of filing. But experts caution that ‘impulse is expensive’ — here's why

·6 min read
Last-minute filer? Getting an advance on your tax refund could get your cash within minutes of filing. But experts caution that ‘impulse is expensive’ — here's why
Last-minute filer? Getting an advance on your tax refund could get your cash within minutes of filing. But experts caution that ‘impulse is expensive’ — here's why

Nearly one-third of Americans put off paying their taxes until the last minute, according to a recent Chamber of Commerce report.

But as the April 18 deadline looms, those 31% of taxpayers may be motivated to get it done in exchange for a hefty refund. But after the flurry of filing, it could be weeks before that money makes its way back to your bank account.

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If your budget is feeling a little strained and you need instant gratification, you might have come across and been enticed by an early refund offer from either your tax preparer or through a third-party company. Some small fees might seem like a fair trade for getting your refund the same day, but experts caution consumers shouldn’t think of it as simply easy money.

“It's important to understand what the cost of that advance is — because there is almost always some sort of cost,” says Rod Griffin, senior director of consumer education at credit reporting company Experian.

Here’s what taxpayers need to know about getting an advance on their refund — and why they may not be an ideal solution for everyone.

How do tax return advances work?

When you file your taxes electronically, you can usually expect your refund to arrive within about three weeks (the IRS takes longer to process paper returns).

But when you apply for an advance with your tax preparer, you could get funds almost immediately, says Griffin. If you’re getting back at least $500, TurboTax offers advances of between $250 to $4,000, depending on your expected refund amount and other factors, as soon as one minute after applying. H&R Block for its part will send out loans between $250 to $3,500 the same day you apply.

And there’s typically very few requirements taxpayers need to meet to qualify. “The collateral is your tax refund,” Griffin explains.

He compares a tax refund advance to a short-term loan that gets repaid in a matter of weeks or months. In some cases, the advance will be automatically deducted from your tax preparer’s refund account once the IRS has processed your return.

Griffin says you may be able to apply for an advance anytime during tax season — between January to mid-April — however each preparer will have their own deadlines. TurboTax’s offer ended on Feb. 15, while H&R Block’s window closed on Feb. 28 this year, however there are still a few third-party providers that are continuing to offer advances online for tax stragglers.

What are the costs?

Before applying for an advance, make sure to read the fine print — you could be charged interest or extra fees that’ll reduce how much of your refund you actually receive.

Griffin says he’s seen interest rates range anywhere from about 6% to more than 36%.

And while some tax preparation services offer advances on your return at no interest charges or loan fees, you might still need to pay to actually use their software.

Read more: The average tax return in 2022 was over $3,000 — but are you getting as much money back as possible?

The money may not come to you as directly as you imagined, either. With H&R Block, taxpayers receive their funds through the company’s Emerald Prepaid Mastercard — which comes along with a $3 fee for ATM withdrawals (not including any extra fees from the ATM operator) and a $1.50 fee for balance inquiries and ATM declines. And if you haven’t used your card in the first 60 days, you’ll also see $4.95 shaved off the top each month.

However, the process doesn’t involve a hard credit check (unlike when you apply for a personal loan) since these services don’t send your info over to credit reporting agencies. But if you default on your loan, it could be sent over to a collection agency and significantly impact your credit score.

“So they're not going to help you build a credit history in most cases, but they could hurt it,” Griffin emphasizes.

When should you apply for an advance?

While getting a hefty tax refund can be a great way to deal with pressing financial concerns — you’ll want to work out the math first to figure out whether an advance is right for you.

Griffin says the best option is to get your receipts in order as soon as tax season begins, so you can receive your refund as early as possible.

“Ideally, you file early, you can save that interest rate and use your refund to pay down that same debt without it costing you anything more.”

Of course, that’s not always possible. And many households are feeling the strain of sky-high inflation and rising interest rates. Griffin notes that credit card balances are ballooning, with delinquency rates rising as well, as inflation remains strong. According to the New York Fed, balances hit a whopping $986 billion in the fourth quarter of 2022.

If you’re struggling to keep up with debt, he says using your refund to pay it off “can be a really good strategy.” However, taking an advanced loan to do it? “Maybe not, because now [you could be] paying interest on two different debts.”

He offers an example of a $1,000 tax refund loan with a 10% interest rate. “You don't get $1,000, you actually have to pay $100.” That leaves you with just $900 of what you would’ve received without the advance.

On the other hand, if you’re paying down a debt that has an even higher interest rate, you could benefit from writing that off immediately with your loan.

Griffin explains if you’re in a dire emergency, like dealing with rent that has to be paid right away or an unexpected medical expense, then applying for an advance might make sense. But if you’re simply hoping to fund a big purchase sooner, like a new TV, it might not be the wisest choice.

“As with all things related to money, patience pays and impulse is expensive,” Griffin says. “So if you can wait, all the better.”

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.