When people need money, they may consider obtaining a tax loan. These loans, also known as Tax Refund Anticipation Loans (RAL) or simply tax loans, are given based on a federal tax refund that is anticipated.
In essence, when you obtain a federal tax loan, you are lent the some or all of the money that you anticipate receiving when you file your federal income taxes. This allows you to use the money immediately, at the time of filing, rather than waiting sometimes 30, 60 or even 90 days for the refund to arrive. In return, most lenders charge interest and/or fees for fronting the money to you.
Many companies offer tax loans, but how they work, how much it will cost you and whether it will be beneficial to you depends on several factors. Before we continue, refer to the questions below to obtain a snapshot of what tax loans are:
- Can I get a loan against my tax refund? Yes, you can get a loan against your tax refund if this type of loan (called “Tax Refund Anticipation Loan” (RAL), “tax advance refund” or simply a “tax loan”). This type of loan is offered by the tax preparation service of your choice. The tax preparation company will partner with a bank that will lend the funds requested. Once you receive your tax refund is received, you have to use the portion that applies to pay off the loan.
- How does a tax loan work? A tax loan is a loan made by a lender that is based on an anticipated federal income tax refund. As with any other loan, borrowers are charged fees and interest to obtain a tax loan. The full amount of the tax refund loan must be repaid even if the refund is lower than the amount anticipated.
- Does Turbo Tax do tax loans? It depends, TurboTax may offer an application for a tax loan in some returns. It will show in the interview to file, at the end of the return. Refer to the Turbo Tax FAQs for more info.
- What is a fronting loan? A fronting loan is a loan provided through a third-party intermediary to a parent company that distributes the funds to a business. In this sense, a tax refund loan is a type of fronting loan.
Now, we are ready to take a more in-depth look at tax loans and what they entail.
What Are Tax Loans?
Tax loans are short-term loans that are based on the anticipated federal income tax return you have. When you file your federal income taxes once a year, you will be presented with whether or not you will receive a refund.
Many people have plans for how they will use the money from the refund, which could include paying bills, taking a vacation or investing in their business. The challenge for some is that they may need the money right away, but the tax return may take as much as 90 days to arrive.
This is where tax loans come into play.
Lenders are confident in offering tax loans because, once you file your income taxes, they know exactly how much you’ll be getting back from the federal government in a refund. As such, many companies are willing to front you a portion or all of this money.
How do tax loans work?
The lender will write you a check in the form of a tax loan, and then when you receive your federal tax refund, you’ll repay the loan. If for any reason your federal income tax refund is less than what you expected, you will still be required to pay the full amount of the loan you took.
The specific rules, regulations, and requirements for tax loans will depend on the company you use to obtain the loan.
Some tax preparation companies – such as Jackson Hewitt, H&R Block, and Intuit Turbotax – will offer what they call free or 0% tax loans, but bear in mind that they are not completely free.
In most cases, these companies will require you to have your federal income taxes prepared by them so they can offer you a tax loan. These “free” loans are not really free since you’ll have to pay a fee to have your taxes prepared and may also have to pay fees associated with e-filing, for example.
Other companies that do not prepare taxes may also offer tax loans. Since they aren’t receiving money from you in the form of tax preparation fees, though, they’ll either most likely charge you a flat fee to extend the tax loan, or they’ll charge interest on the amount of money you take as a loan.
How much are tax loans?
The answer is that it depends on a few things, such as:
- What company you are using
- What fees and/or interest they charge
- Any other fees such as for e-filing
When you factor in all the costs associated with tax loans, you could end up spending up to as much as 10% of your refund just to get the money a few months sooner.
Still, there are times when you may need a business loan to fund an aspect of your business, for instance, so tax loans may make sense.
Pros and Cons of Tax Loans
There are several positives to tax loans, and some negatives as well. Here are just some of the factors you should consider.
Advantages of tax loans:
- They give you advance of tax refund money to use to pay bills or fund your business.
- You don’t have to wait for as many as 90 days to use your tax refund.
- They can end up being “free,” in essence, if you planned to get your taxes prepared by a company such as H&R Block anyway.
- They give you the capital you need to fund an important business improvement or investment.
Disadvantages of tax loans:
- You could end up paying high fees or interest (as much as 10%) for an advance on money you’ll get in a few months.
- You would be responsible for the full amount of loan, even if your federal tax refund ends up being less than expected.
- You may end up paying fees to have your taxes prepared and also interest on the money borrowed.
- Your tax refund might not be enough for you to fund your business investment.
Do Tax Loans Make Sense for You?
In certain situations, tax loans could be a good option if you need cash now and are expecting to receive some money in the form of a federal income tax return. In some cases, these tax loans could end up being free, essentially, if you can get a 0% tax loan, and were planning to get your taxes prepared by a company that offers these types of loans.
But tax loans aren’t for everybody. They may not be the best option for you if you are intending to use the money to fund your business.
In most cases, a small business loan is a much better way to fund business improvements or any other business investment.
At Camino Financial we always aim to live up to our motto, “No Business Left Behind,” and we do that through attractive small business loans as well as educational tools and resources for small business owners like you.
Request a quote for a small business loan today and start building your business’ success.