What are Refund Anticipation Loans?

A refund anticipation loan (or tax refund anticipation loan) is a loan (cash advance) by a lending institution secured against a borrower’s pending tax refund check. They are also called fast cash refunds. By their nature, refund anticipation loans are therefore most popular/available during tax season (January through April). The lending institution then receives the borrowers tax refund automatically from the government, plus the associated interest and fees (which the borrower must pay). Many people find a refund anticipation loan useful if they encounter unexpected expenses such as car or house repairs or short-term difficulty in maintaining regular payments such as utility bills. It acts as a cash flow bridge.

It is a short-term loan, the amount depending largely on the size of your anticipated refund amount. The key for many borrowers is that a refund anticipation loan, just like a payday loan, does not require a traditional credit check. The main difference between a refund anticipation loan and a payday loan (insert link to page) is that they can be typically up to $10,000 in size, compared to an average payday loan of $500, and the borrower (taxpayer) usually applies for the loan through a paid tax preparation firm, who then arranges the loan through a lending institution (usually a bank) on the borrower’s behalf. The borrower simply signs a form at the tax preparation office during the normal filing of their tax return, pays a fee and receives their loan within as little as one day, or instantly in some cases. In addition to tax preparation firms performing the role of refund anticipation loan ‘arranger’, this service is also provided by other businesses such as car dealerships, furniture stores etc, who take the pending tax refund as down payment on goods.

The benefits of a refund anticipation loan are that loan proceeds can be received in as little as one day (or instantly) from the borrower’s application, the borrower does not need a personal bank account, and the preparation fee is deducted from the eligible loan amount, therefore, cash for the fees is not required to secure the loan.
The disadvantage of a refund anticipation loan, is that due to the nature of the loan i.e. unsecured on any sort of property and lent without a traditional credit check, the borrower will pay fees and an interest rate usually well in excess of that if a traditional loan was available, therefore, the cost of borrowing should be balanced with the late fees that would otherwise be incurred by the borrower on regular payments such as utilities or credit cards. The tax preparation firm (or other arranger) will receive a set fee for originating the loan. The fee is made up of three elements: the Loan Fee, the Administrative/Electronic Filing Fee, and the Tax Preparation Fee. The actual lending institution (bank) then charges interest or finance charges based on the loan amount. The figure for repayment will include interest and fees, which will vary by lending institution but could add up to an interest rate in hundreds of percent when annualised.

The lending institution/arranger should inform the borrower of the following, so it is always worth checking this information is available before proceeding to sign any loan agreement:

1. The total amount of all charges and fees and the estimated annual percentage rate this equates to;
2. The expected length of time before the loan will be deposited to the borrower;
3. Any charges or fees for electronically filing the tax return; and,
4. The anticipated length of time within which the borrower would expect to receive the tax refund WITHOUT a refund anticipation loan (this could only be a matter of days with electronic filing).

It is also worth noting that if the anticipated tax refund is denied, delayed, or reduced for any reason, for example, reductions for missed student loan payments, child support, etc. the borrower is still responsible for paying back the full refund anticipation loan to the lending institution.