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2 Reasons to Take Out a Tax Refund Loan (And 2 Reasons Not To)

LOS ANGELES - January 19, 2021 - (Newswire.com)

They say that patience is a virtue, but cash-strapped taxpayers don't have the luxury to be patient when there's available money on the table. Can you wait twenty-one days for that refund to come in? That's a big ask after a year like 2020.

Thankfully, there's another option. Most tax preparation services offer tax refund loans that can put money in-hand immediately without waiting for a check in the mail or direct deposit to hit your account. Here are two good reasons why this might be the right option for you.

Reason #1: Paying off holiday debt

Knowing there's a tax return on the horizon tends to loosen up our spending habits over the holidays. Unfortunately, by the time the W-2 forms have been received and we get to the tax preparer, interest is already accumulating on our holiday credit card purchases.

Paying off debt quickly is the best way to avoid compounded interest payments, so that twenty-one day minimum waiting period for a tax return could cost you quite a bit if you're leveraged from the holidays. Taking out a tax refund loan could help solve that problem.

Reason #2: The IRS will be backed up this year

Our twenty-one day estimate for a tax refund is based on what has happened in previous years. It's unlikely that anything at the IRS will move that quickly in 2021. The IRS has been experiencing delays since August, and the start of the next tax cycle will only invite further slowdowns.

Two Arguments Against Taking Out a Tax Refund Loan

There's always a con or two for every pro. Though there are good reasons to take out a tax refund loan, many of them situational, there are also a few arguments against it. 

Argument #1: There are always fees

Actions taken by federal regulators in 2012 made it more difficult for tax preparers to charge high interest and fees on tax refund loans, but that doesn't mean those charges aren't still there. Even if the loan is "free," the cost has been added into your tax preparation fees.

Argument #2: Your refund amount isn't finalized

The refund amount calculated by your tax preparer is not necessarily the final amount you will receive. If you take out a loan against your refund and it's reduced, you'll end up owing that money back. Make sure you don't owe back taxes, child support, or have a lien against you.

Making a Decision about a Tax Return Loan

This article has outlined a couple of good reasons to take out a tax refund loan and some arguments against it, but only you know which factors matter the most for your wallet. If a tax refund loan doesn't seem like the best fit for your financial concerns, consider alternatives like online loans, which are more accessible and competitive in an age of increased digital banking.

Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.




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