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Too High a Price: Avoid Taking a Loan Against Your Tax Return

With credit card bills from Christmas spending breathing down your neck every January, on top of all your other expenses, your income tax refund check can seem very important - and very far away. If you've been scratching your head, wondering where you're going to get all the money you need, your ears might have perked up when you heard that commercial promising easy loans against your income tax refund that can be in your hands in hours. When money is tight, that sounds pretty tempting. Before you go counting your cash, though, wait. The bad news is that taking a loan against your tax return will cost you hand over fist. Instead of helping you climb out of a financial hole, these loans will just dump more dirt on your head.

The way these loans work is simple. You go to a participating company with your tax information, and they issue you a check based on your estimated refund amount. In most cases, you don't get a loan for your entire refund amount, but rather a portion of your refund. Most loan companies insist on being the ones who actually do your taxes as well, but some companies will except returns prepared by you or another company. To get the loan, you usually have to pay a fee of anywhere from $30 to $90, plus a $40 electronic filing fee, plus any fees associated with preparing your return. The loan company then sets up a special account so that your refund from the IRS goes directly to them. Your loan is considered paid in full when the IRS deposits your refund into that account. The difference between what was loaned to you and what the IRS pays you is the interest you paid on the loan.

The interest is where they get you. Expect to pay at least 200% in interest, if you're lucky. If you're not so lucky, you can pay upwards of 2000% in interest on your loan! In fact, in 2005, American doled out over $900 in tax refund loan interest payments. These laughable interest rates get even more ridiculous when you consider the average length of a tax refund advance loan: ten days. On average, tax refund loans help you get your hands on your cash ten days before the IRS would have paid you, and you pay at least 200% for the privilege.

Despite the horrific interest rates attached to these loans, millions of Americans rely on them every year. Before you jump and get one of these loans, carefully consider your options. At interest rates like these, you are better off borrowing the money off of even your highest interest credit card; the IRS will pay you before the billing cycle is even completed and interest accrues. Late fees are cheaper than these loans. Overlimit fees are cheaper than these loans. If your mortgage company is threatening foreclosure, which financial experts say is the one and only reason you should ever even consider a tax refund loan, take your tax return to your bank to show them the amount of the refund you are expecting and beg for an extra ten days.

If time is of the essence and ten days just won't cut it, then take advantage of the IRS's Free File program to get your taxes in electronically. It will speed up the processing of your return and get you that refund faster. Don't fall prey to these loan sharks; for your financial well being, scratch this last resort right off the list.