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Tax Refund Loans: All You Need to Know


You can avail a loan against your tax refund. This is a short-term loan that lasts for less than a month. You can use this loan type for meeting financial contingencies. It is a good option for people who have a low credit score. The following are the key aspects related to a tax refund loan:

What is a Tax Refund Loan?

A tax refund loan is a short-term borrowing against the tax refund that you expect to get. The loan amount is directly deducted from your tax refund after it is issued. You can get tax refund loans ranging from $200 to $3,500 depending upon your expected tax refund. A tax refund loan is officially known as a refund anticipation loan (RAL). The loan tenure is under a month which is the time it takes for the IRS to process your tax refunds. In case your refund is less than the loan amount, you will have to repay the loan back in full to the lender.

Cost of Taking a Tax Refund Loan

Generally, most tax refund loans will not have an interest component. However, you should consider that even if the loan is availed at 0% interest, it is not free. There will be costs attached to it by the lender. If you take a tax refund loan from the H&R Block office, the fees will start from $59. If you pay $59 for a $500 loan, with a borrowing tenure of 1 month, this comes to an annual rate of 144% for the loan. This makes it a very costly borrowing alternative. However, if you were going to pay the fees anyways for tax preparation and filing purposes, you can see the situation differently.

Pros and Cons of Tax Refund Loan

The biggest benefit of taking a tax refund loan is that the process is simple. The paperwork is minimal and the funds may be available in your bank account in under 24 hours. Another benefit is that even if you have a low credit score, your chances of getting a tax refund loan would be reasonable. The lenders generally don’t consider your credit score for giving you a tax refund loan.

You should remember that a tax refund loan is not free. It has costs associated with it. You may not have to pay interest payment on the loan there are other fees attached to it. It depends on the lender the type of costs they attach with their loans. You should be careful enough to inquire about the costs associated with the loan before going ahead with it. Your actual tax refund may be different from anticipated return. If you owe anything to a federal or state debt, your actual tax refund may be reduced by that amount. This will mean that you will end up with much lesser money after paying back your tax refund loan fees.

Can You Take a Tax Refund Loan with Low Credit Score?

Usually, lenders don’t consider your credit score for processing and approving a tax refund loan. A tax refund loan is like a secured loan as it is being made against the tax refund that is likely to be processed to your bank account. The risks for a lender with a tax refund loan is less than compared to a traditional loan or line of credit. While your credit score is not a major consideration for getting a tax refund loan, it can still dent your credit score. If the lender makes a hard inquiry on your credit score, it can negatively impact your score. In case of a soft inquiry or no inquiry made by the lender, your credit score will not be affected.