Patience Worthwhile If You Expect A Tax Refund From Irs Preparer Loans Carry Interest Rates As High As 225 Percent

There’s something to be said about patience when you’re due a tax refund.

Many consumers speed up the process by getting refund anticipation loans. But if you crunch the numbers, you’ll find you’re better off finding other ways to get that cash or simply waiting for it.

Refund anticipation loans are offered by financial institutions through tax preparers.

Taxpayers apply for the loans through the preparers when their tax returns are filed electronically.

If a loan is approved, the taxpayer gets a check in two to four days.

The lender is repaid within 11 to 21 days, when the Internal Revenue Service deposits the tax refund in a special account established with the financial institution.

Tax preparers and financial institutions say the loans are a good option for people who need their refund money quickly.

But you’re going to pay a high price to get that money in your hands.

Remember, this is a loan, not free money. For example, in order to obtain a refund anticipation loan through H&R Block, you have to file your return electronically. You pay a fee for that - $30 if Block prepares your return and $45 if someone else prepares it. Then there’s the finance charge. Beneficial National Bank handles refund anticipation loans for H&R Block customers. If your loan amount is $500, the finance charge is $39.95. Since this is such a short-term loan, the annual percentage rate comes out to a whopping 225 percent. If your loan is for $3,000, Beneficial charges an $89.95 finance charge, which comes out to an annual percentage rate of 87 percent.

And that doesn’t include the tax preparation charge.

The electronic filing fee, the finance charge and tax preparation fee are deducted from the loan amount. That means you’ll get less than the actual refund amount.

At those high interest rates, a cash advance on your credit card looks like a bargain.

If you really need the money, try to find other ways to get it, such as borrowing from friends or family members.

If you can wait a little while for the money, consider filing your return electronically and asking the IRS to electronically deposit your refund directly into your bank account. You’ll get your refund within about three weeks or less.

That compares with about six weeks if you file a paper return.

If you can’t avoid a cash crunch this year, plan ahead for next tax season, so you can avoid being in such dire financial straits again.

One way to do that is to reduce your tax withholding (getting a refund means you gave the government an interest-free loan through overwithholding) and deposit the difference in a savings account.

Making such a withholding adjustment on your W-4 form would give you more after-tax money.

That could make the difference between being desperate for a quick tax refund next year and having enough of a financial cushion that you can wait patiently for your refund to get to you.