Many people are waiting for their tax refunds as a financial benefit, especially as tax season draws near. On the other hand, some of these refunds can be complicated and challenging, specifically when one has financial needs to meet. This is where taking out a refund anticipation loan comes in. This is the solution provided by financial institutions to taxpayers.
Hence, they can easily access part of their expected tax refunds. Even though these loans provide relief and security, they come with possible disadvantages and certain considerations. In this article, we will discover the complexities of refund anticipation loans, their risks and benefits, and other factors to consider before applying for one.
What Is A Refund Anticipation Loan?
A refund anticipation loan is also known as RAL and it is a temporary loan provided by financial institutions to taxpayers, usually around tax season. People who are anticipating a tax refund from the government can consider taking out a refund anticipation loan. Thus, instead of waiting for your refund to be processed and issued by the authorities, you can opt for a refund anticipation loan to get a part of your awaited refund upfront.
How Does It Work?
The concept behind refund anticipation loans and how they work is quite straightforward. First of all, taxpayers will have to apply for one through a tax preparation service provider or an accredited financial institution. Next, the lender will review and access the expected refund amount and eligibility of the taxpayer using their tax return information.
After evaluation, if you are approved for the loan, your account will be credited by the lender within a few days. Taxpayers usually get the deposit in the form of a prepaid card, direct deposit, or check. Then you can start paying back the loan when you get your tax refund from the government.
Eligibility Requirements
If you are interested in taking out a refund anticipation loan, you need to be qualified. However, the eligibility requirements differ by lender. Nonetheless, here are the basic requirements to meet to be qualified for a refund anticipation loan:
- You must have filed a tax return with the government.
- Valid Social Security Number.
- Applicant must not have outstanding liens or debts.
- Credit information.
- Income information.
You must also be expecting a tax refund from the government as well.
Pros and Cons of Applying
Here are the potential benefits and drawbacks of applying for a refund anticipation loan:
Pros
- Swift access to funds.
- Makes the tax filing process easy.
- Peace of mind.
- Covers unexpected emergencies or expenses.
- The refund process was made easy.
- Convenience.
- Financial stability.
- Early bill payments.
- Available for people with no or poor credit history.
- High-interest payday loans are avoided.
- Good for people without emergency funds and savings.
Cons
- High fees and interest rates.
- The potential cycle of debts.
- Exposure to predatory practices.
- Overall tax preparation service cost increase.
- Availability is limited.
- Encourages unnecessary borrowing.
- Potential complications and delays.
- Lower net refund.
- The loan amount may differ from the actual refund amount.
- Reliance on short-term loans.
- Financial dependence is not encouraged.
When To Take Out a Refund Anticipation Loan
Undoubtedly, taking out a refund anticipation loan gives borrowers this form of security and relief, especially if they have unexpected expenses to attend to. So, what is the best time to consider or take out a refund anticipation loan? You are about to find out.
You can take out a refund anticipation loan if:
- Have urgent financial needs like overdue bills or medical expenses.
- Cannot qualify to use other credit forms because of low income or poor credit history.
- If you need a temporary financial solution until your tax refund is issued.
- If you are expecting or looking forward to a tax refund.
When Not to Take Out
Even though this loan type provides financial security, it is not always a good idea to take out one because you need to cover unforeseen expenses. Here are the worst times to take out a refund anticipation loan:
- If you can wait for the government to process and issue your tax refund.
- When the interest and fee related to the refund anticipation loan decrease the net refund amount.
- If you might fall into a financial dependency or cycle of debt.
- If you can negotiate the payment arrangement and plan with your service provider.
- When there are other available alternatives like low-interest loans, savings, and emergency funds.
How To Apply for a RAL
There are different steps involved in the taking out of a refund anticipation loan. Moreover, the application process may differ depending on the tax preparation service provider or financial institution you choose. Here is a guide you can follow to begin:
- Prepare the necessary information.
- Choose a reputable lender.
- Schedule a visit to the provider or lender.
- Fill out and complete the RAL application form.
- Enter your name.
- Address.
- Social Security Number.
- Contact information.
- Income details.
- Provide your tax information.
- If applicable, undergo a credit check.
- Review before agreeing to the loan.
- Sign the loan documents.
- Await loan approval.
After the loan has been approved for you and you have been credited, if you receive your actual tax refund, pay back the borrowed loan. You also need to pay the associated interest and fees as well.