If you’re hoping to get a Tax Refund Anticipation loan this year, think again.
All year a percentage of your hard-earned money is taken out of your paycheck and goes straight to the IRS. The entire process is automated and you never see a single penny of it. But, when it’s time to get your tax refund check it seems to be much more complicated.
How are you supposed to make ends meet while you wait up to 6 weeks to get your tax refund check? Well, taxpayers were previously able to take advantage of a tax refund anticipation loan from an income tax preparation office. But not this year.
Consumer groups fought hard to eliminate refund anticipation loans and they won. Income tax loans are no longer available from major banks on a large scale basis.
While these Consumer groups thought they were protecting taxpayers, over seven million people will be looking for alternatives to tax loans this year while they wait for their tax refund check.
If you were one of the seven million taxpayers who applied for a refund anticipation loan in previous years, where can you turn for help? The good news is that there are still alternatives available if you need a short term loan.
What is a Refund Anticipation Loan?
A Refund Anticipation Loan is a short-term loan offered to taxpayers expecting an IRS income tax refund. The loan is secured against the taxpayers estimated refund.
If you are looking for a tax refund loan, you’re not alone. Recent data estimates that over 5 million Americans received a Refund Anticipation Loan in previous years. Considering the Average tax refund is over $3,000 and it takes up to six weeks to receive a refund, it’s no wonder so many people turn to short-term loans for help making ends meet.
To help the taxpayers that do not have a bank account receive their tax refund via direct deposit, many tax preparers are now offering Refund Anticipation Checks.
Refund Anticipation Loan Alternatives
Today it is illegal for lenders to offer Refund Anticipation Loans to taxpayers because they tend to have high interest rates and additional fees. Under the Military Lending Act, service members are strictly forbidden from taking out a Refund Anticipation Loan.
While the government is working to protect taxpayers from Refund Anticipation Loans because they believe it is a form of predatory lending, there are millions of American’s looking for short-term loan options while they wait for their tax refund check.
Making Refund Anticipation Loans illegal doesn’t make the problem go away. In fact, it may leave over five million Americans without a way to make ends meet while they wait over six weeks to get their tax refund check in the mail.
Where should taxpayers turn for short-term financing help? Below are a few alternatives to a Refund Anticipation Loan.
1. Refund Anticipation Check
A refund anticipation check is a service provided by tax preparation companies to taxpayers that wish to receive their refund quickly via direct deposit.
The service works via a temporary bank account where the refund is deposited. Then, the balance is placed onto a prepaid debit card. In contrast to the normal refund process, taxpayers can receive their refund up to six weeks earlier with a refund anticipation check.
One advantage of a Refund Anticipation Check is that there are no upfront fees. Any tax preparation fees are deducted from the tax refund. The refund can be received in as little as 8 to 21 days after IRS acceptance of your tax return.
Why would anyone use this service rather than have their refund deposited directly into their bank account?
A surprising fact is that almost 17 million adults do not have a checking or savings account, according to a study by the FDIC.
Another shocking figure is that one in four of all U.S. households handle some or all of their financial transactions outside of the mainstream banking system. And this number is still growing!
While many consumer watchdogs are vocal about the fees charged on Refund Anticipation Checks, the reality is that these underbanked taxpayers have no other option! But for most, this is the preferred choice as they do not have enough money to open a standard checking account.
2. Peer to Peer Lending
Even though banks are not allowed to offer Refund Anticipation Loans anymore, it doesn’t mean you can’t get the money you need. One solution is to turn to peer to peer lending for financing help.
Instead of getting a personal loan from a bank, peer to peer lending works by connecting borrowers to individual investors online. Borrowers can get up to $35,000 for almost any purpose.
Over $1 billion in loans have been issued to borrowers all across the United States with peer to peer lending. The advantage of P2P lending over Refund Anticipation Loans is that they offer low interest rates and higher loan limits.
You can also have the peace of mind that peer to peer lending is anonymous for both borrowers and lenders, meaning your privacy is safe online.
3. Credit Card Cash Advance
One of the quickest alternatives to a Refund Anticipation Loan is a credit card cash advance. There are no approvals or waiting periods.
The trade-off for having easy access to cash from your credit card company is that cash advances typically have higher interest rates. Sometimes as high as 20 percent!
Many financial gurus urge consumers to stay away from taking out a cash advance loan because it is an expensive form of credit. This is sound advice for the majority of taxpayers that have alternative means of financing available to them.
But what about the millions of Americans that are struggling to pay their bills while they wait for their tax refund from the IRS? A credit card cash advance may be a reasonable alternative to a Refund Anticipation loan.
Do You Really Need a Refund Anticipation Loan?
Before you consider our alternatives to a Refund Anticipation Loan take the time to look for other solutions. Can you cut back on your spending to cover your monthly expenses? Are there friends or relatives you can turn to for help?
The loan alternatives we suggested are available to Americans that are looking for short-term loan help. It is important to note that personal loans should be used only when other financing opportunities are not available.
As always, we recommend that you use short-term financing products responsibly and ask for professional finance advice before taking out a loan.