Each year, the majority of tax filers find themselves getting money back from the IRS after submitting their returns. And while refunds have been lower so far this year than in years past, millions of Americans are likely to get one on their 2018 taxes.
The good news about tax refunds is that they're generally issued pretty quickly for uncomplicated, error-free returns. If you file your taxes electronically, the IRS says you can generally expect your refund within 21 days. Signing up for direct deposit might further expedite the process, in fact.
If you file a paper return, your refund might take a bit longer to arrive. You'll generally need to give the IRS a good six weeks for a refund in that case.
But what if you need that money sooner? If you're desperate for cash, you might be tempted to get a refund anticipation loan (RAL).
An RAL is essentially an advance on your tax refund made by a private lender. Some major tax preparation companies offer RALs to clients, and at first, they might seem like a good deal. But before you sign up for one, make sure you know what you're getting into.
The dangers of refund anticipation loans
The upside of an RAL is simple: You get the money the IRS owes you immediately, even if your refund isn't actually issued for several weeks. The downside, however, is that, as is the case anytime you borrow money, you'll end up on the hook for interest on that sum. And while you might assume that you'll pay a minimal amount of it, what with your limited borrowing window, there are other fees involved.
For one thing, some tax preparation services will only offer RALs to clients who utilize their services -- services that could be quite expensive. Furthermore, sometimes refund advances come in the form of prepaid cards that charge transaction fees. For example, you might get a debit card with your refund amount on it, but you'll be hit with a fee every time you use it.
Furthermore, getting an RAL might impact your credit score. The reason? Qualifying for one might involve a hard inquiry on your credit record, which can take your score down a notch. If you have relatively good credit, and you're not applying for other loans or credit cards around the same time, then this won't be a major issue, but it's something to consider nonetheless.
Finally, keep in mind that in some cases, you might get charged a fee to apply for an RAL -- even if you're ultimately denied. Talk about wasted money.
Sit tight and wait it out
Tempting as it might be to access your refund cash sooner, your best bet is generally to avoid the costs associated with an RAL and let the IRS get through its usual process. You can use the IRS's "Where's My Refund?" tool to check on the status of your refund so that you know when to expect it, keeping the aforementioned time frames in mind.
And remember, there are three things you can do to avoid having your refund delayed: File electronically, sign up for direct deposit, and make sure your tax return is error-free. If you hit those key points, you'll generally be looking at a minimal wait to get the money you're eagerly anticipating.