Early filing income tax loans, also known as refund anticipation loans, allow you to take an advance against your expected income tax refund. This is typically a short-term loan for 10 to 14 days to cover the interval between electronic filing and when you receive your refund. The advent of electronic tax filing made early filing loans possible because you and your tax preparer can instantly see the amount of the refund you will be receiving, and assess the risk of loaning money to you.
A standard refund anticipation loan typically funds two days after you file your return electronically. You can choose to receive a check, direct deposit or pre-loaded debit card. If you have good credit, you may qualify for an instant tax anticipation loan. With an instant loan, the tax preparer will transfer money to your account before you leave the office.
Refund anticipation loans are beneficial if you need cash right away and cannot obtain a traditional bank loan. This may be the only option for taxpayers with bad credit. The payment terms and future cost of the loan is also fixed, which makes it easy to budget for the repayment. The payment is taken out of your upcoming refund so you know you'll have the money when it is due.
The tax preparer will complete your tax return to determine the amount of the refund you are due. If you owe money, you are not eligible for an early filing loan. You must pay the required loan fee and the electronic filing fee to send in your return. The loan fee varies based on the amount of your refund. You may be required to sign over your rights to the refund as part of the loan agreement. The IRS notifies tax preparers and other lenders if you owe child support or student loan payments.
You're required to pay interest and fees that may be significantly higher than other loan options. Interest rates on refund anticipation loans can reach over 100 percent when annualized. Because of the high cost for such a short period of time, you should exhaust all other avenues before applying for an early filing loan. Make sure tax preparer discloses all payment terms and applicable fees. There may be additional fees for receiving your refund on a debit card or cashing a check.
Shop around before committing to a tax refund loan. Look for the best payment terms and interest rate. Be wary of shady lenders with no references or reviews. Once you find a reputable company with favorable payment terms, pay attention to the terms of the loan agreement. Make sure your refund covers the entire cost of the loan so you don't owe more money out of pocket when your refund arrives.
Denise Sullivan has been writing professionally for more than five years after a long career in business. She has been published on Yahoo! Voices and other publications. Her areas of expertise are business, law, gaming, home renovations, gardening, sports and exercise.