Tax time has come, which means many people are expecting a nice check for refund in the coming weeks. Indeed, it can be exciting to get your hands on a pile of money from the government, especially if you want to achieve big goals like getting a down payment for a car, increasing your retirement savings, or paying off debt.
Some people get so excited about receiving a refund that they don’t even want to wait for the standard 2-6 week period required by the government to send the money. Instead, they choose to take out tax refund anticipatory loans. So how do these loans work and are they really a good idea?
The basics of repayment loans
A repayment anticipation loan (RAL) is a tax repayment loan that gives you access to your repayment before it is delivered by the IRS. These types of loans are usually provided by large tax preparation companies and must be paid back when the tax refund actually occurs.
Just like a payday loan, RALs come with extremely high interest rates and fees.
To obtain an anticipatory repayment loan, you should contact a local credit institution for information on the different rates and options available. In some cases, personal and financial history can play a role in loan approval. Some institutions may offer you the loan claiming that there are no hidden costs, fees or interest, but you should still be careful. Sometimes that interest-free loan comes with a debit card that may have its own costs.
Protect yourself: How to Report Tax Fraud
Is it a good idea to close a RAL?
The only benefit of taking out an IRS anticipation loan over waiting for your check to arrive is the speed of the process. Instead of waiting weeks for your check to appear, you can receive your money in a week – or less – with a RAL.
If you are short on money, this type of arrangement can be very helpful. But before you think about it, it’s good to know the potential drawbacks of RAL:
High interest: As mentioned earlier, the interest on an anticipatory repayment loan can be huge depending on the company you work with. For some, the amount to be refunded simply doesn’t justify receiving the refund a few weeks early.
Reverse loan: You may be able to get a RAL that, after fees and interest, exceeds the amount of your tax refund. If this happens, you will be required to repay the balance, not to mention that you will have to pay heavy fees and penalties if you are unable to repay the loan on time.
Just because there are some drawbacks to RAL does not mean they should not be taken into account. It is especially important to know what the downside could be and also to know alternatives.
Read next: What to do if you can’t afford your tax bill
An alternative to RALs
If you think the RAL might not work for you, another option to consider is file your taxes online under your own steam, so that you get your money back within 10 days. In many states, residents can apply for free if they earn less than a certain income. The only requirement is that you have a bank account so that your money can be deposited immediately.
It is good to note that the Federal Deposit Insurance Corporation (FDIC) considers RAL to be “unsafe and vice”. Of course, it is entirely up to you to choose whether or not to receive this type of tax refund advance. Before making a choice, however, you should weigh all of your options and make sure that you can actually afford the cost of this quick refund pick.
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Last updated: January 6, 2021
This article originally appeared on GOBankingRates.com What Are Repayment Expectation Loans (and Are They Really Worth It)?
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