The only thing that can match the anticipation of a child on Christmas Eve is the anticipation of an adult waiting on tax return money.
Of course, tax preparers and banks know this, which is why many are eager to offer the chance for taxpayers to get their money before the IRS issues its refund.
In 2017, taxpayers took out about 1.7 million tax return loans, according to a report from the National Consumer Law Center (NCLC). That was up slightly from the previous year.
There isn’t much other research about how many people choose to take out a tax return loan, but Carla James, who works in the Financial Foundations program at John Boner Neighborhood Centers, thinks it’s gotten less common locally.
James, who is also a site coordinator for the Volunteer Income Tax Assistance program, said people who feel that they need their tax return right away probably need all of that money, and they stand to lose at least some of it through the lending process.
“We have a conversation with them,” she said. “We don’t tell people what to do. That’s not our way. But we have a conversation to figure out what their needs are.”
James said one of the most common risks associated with getting a tax return anticipation loan is the IRS may not actually give you the refund you were expecting.
That can happen for numerous reasons — maybe the IRS needs to keep a portion of your refund to pay back taxes, for example — but borrowers in that case would lose out on money right away because they took more money than they’re getting back.
Refund anticipation loans are an especially attractive option for low- and moderate-income taxpayers who are more likely to have the earned income tax credit and child tax credit.
Between 2009 and 2012, banks that offered high-cost refund anticipation loans either stopped voluntarily or were forced to stop by federal regulators because fees often translated into triple-digit annual percentage rates and moved a significant amount of a taxpayer’s return to banks and tax preparers.
Those types of refund anticipation loans are mostly a thing of the past, but taxpayers still need to be careful.
Even though some places market their tax return loan as having no interest, James warned other fees and fines — service fees, debit card activation fees, etc. — can add up fast. Some refund anticipation loans have interest rates as high as 45%.
Especially burdensome loans can basically equate to a payday loan, James said.
Chad Reynolds, a financial planner and wealth management advisor at Northwestern Mutual, said there aren’t many situations where getting a tax return loan makes financial sense, but that doesn’t mean it’s always a bad idea.
“Unfortunately, some people find themselves in a situation where they really need that money to handle day-to-day finances or an emergency,” he said. “… Generally, I think it’s not a great idea to do, but everyone’s situation is unique, and I try not to judge.”
For those who legitimately do need that money immediately and can’t wait the approximately 21 days for the IRS refund, Reynolds said it’s best to do research in advance and figure out which service providers offer the lowest fees.
That means comparison shopping just like you would for a new car or TV. Reading through fine print can be tedious, but it could save you money.
Another option that carries a little less risk is getting a “no-fee” refund anticipation loan.
These loans don’t come with an interest rate, and it won’t be approved until after the IRS approves your return, meaning you don’t run the chance of taking more money than you’ll actually get back.
“I don’t think there’s anything wrong with getting advances because they’re often fee free,” said Brittany Sabalza, who works as a tax preparer.
Tax preparers officially pay the fee for this type of loan, but the NCLC warns preparers will try to recoup those costs through additional fees and other indirect charges. Sabalza said the highest fee she’s seen a tax preparer charge is about $40.
The approval process is based off of tax history, so those who have previously had tax return money held to pay back taxes, for example, are more likely to be denied.
With both the traditional and “no-fee” refund anticipation loans, Sabalza warned it’s always best to read carefully and know exactly what you’re signing up for.
“When people are going for loans, they do not look for those fees,” she said. “They think, ‘I’m just getting a tax refund and these people are gonna loan me my money until my refund comes in.’”
Contact staff writer Tyler Fenwick at 317-762-7853. Follow him on Twitter @Ty_Fenwick.