The biggest reason to avoid tax refund loans is that they are expensive

In some instances, they look eerily similar to payday loans – small, short-term loans with high interest rates. Note that if you get a loan from a well-known tax filing service, you will likely pay less than if you go through a third-party lender.

Lenders typically charge an application fee that can be as high as $100. If they are helping you file your taxes, you will need to pay the cost of filing (probably about $40). There will be another fee that depends on how you receive your loan. For example, getting your loan on a prepaid debit card could carry a fee of $30 while getting it on a check might have a $20 fee. Lenders may also charge a number of other small fees. On top of the fees, you will need to pay interest for the loan. Your interest rate will be in double digits and in some cases may be triple digits.

All told, you can expect to pay 10% or more of your refund just to get a two-week loan. Of course, you may have to pay more if your refund is delayed or if there are any other issues. Keep in mind that deadlines for tax refund loans are typically early. So child support, back taxes, student loans, and other factors could reduce the amount of money that you expect to get refunded from the IRS.

Risks of Tax Refund Loans

The main concern with a tax refund loan is the cost. Make sure that you understand all of the costs associated with the loan. For example, you may need to pay penalties if your IRS refund doesn’t arrive within a certain amount of time. The last thing you want is for the loan to go delinquent. This will lead to interest and an even higher cost for you.

Another concern is that you receive a lower refund than you anticipate. In that case, you will have borrowed more than you got from the IRS and you will need to come up with the money to pay off the loan. That doesn’t include any extra fees and interest. You can estimate your refund with SmartAsset’s free tax refund calculator.

Sometimes the IRS will also take longer than usual to process your refund. That could be due to an error in your return or because the IRS simply has a lot of returns to process (as is the case early and late in the tax season).

Alternatives to a Tax Refund Loan

Tax refund loans are not usually worth the high cost, so here are a few alternatives that may be better for you:

1. Wait for your refund. Yes, waiting is not always the ideal solution but if you e-file your tax return and elect to receive your refund via direct deposit, the IRS may process your return in just one or two weeks. In some 24 hour payday loans Lewisburg OH cases, waiting two weeks will be better than paying $100 or more for a short loan. Keep in mind that different filing methods will take longer.
2. Lower your tax refund. If you’re getting a big tax refund ever year, it means you’re overpaying on your taxes throughout the year. It’s nice to get a big refund check, but you could also have that money in your bank account during year, which may help avoid a situation where you’re short on cash and relying on a refund loan. To do that, you would need to fill out your W-4 more accurately. This will require a bit more planning on your part but it’s a good way to maximize your take home pay.