What is a Tax Refund Loan?

A Tax Refund Loan also known as a refund anticipation loan, allows a potential borrower to receive a loan based off of their anticipated tax refund for the year.

How they work: Tax refund loans function to serve people who don't want to wait for their tax refund to be mailed or direct deposited. Instead, the borrower takes out a loan with the intention to repay it with the tax refund they receive at the end of the year. The loan amount is based off of this anticipated amount. The lender opens up a one-time-use account for the borrower and deposits the loan into it. The borrowers' tax return also is deposited into this account, from which the lender takes the loan amount and fees when the loan is due.

IRS May Restrict Tax Refund Loan

Many news sites like MSNBC, BankRate and Forbes recently reported that the IRS may restrict tax refund loans on grounds that they could encourage fraud. Consumer watchdog groups are concerned that these loans could be abused by unscrupulous tax preparers who might be tempted to inflate the refunds in order to collect higher fees. The result of this proposal would limit tax preparers from providing tax return information to lending companies that provided tax refund loans. Companies who specialize in tax preparation services such as H&R Block Inc witnessed their stock prices fall with the news of this possibility.

Payday Loans are a Great Alternative

For customers who are a looking for a quick cash advance, the thought of using a tax refund loan for quick cash might sound like a great option. But there are a few things one should know about these loans. First, most people who take out a payday loan usually know how much their going to have from their next paycheck. This knowledge gives them a better idea of how much they should borrow. With a tax refund loan, the anticipated refund amount is not always guaranteed. The miscalculation of a tax refund could wreack havoc on a borrowers' finances when the time comes to repay the loan.

A another problem with tax refund loans is that, according to BankRate.com, many consumers who take out tax refund loans do not have bank accounts. A payday loan from ThePaycheckStore requires that the customer have an active bank account and at least $1000 in monthly income or deposits. This helps to ensure that customers who apply for cash advances are consistent earners who will not be strung out on debt.