How to Fight the Urge to Borrow Against Your Tax Refund

USA Treasury IRS refund check

By Steve Nicastro

Taking out a loan based on money you're expecting to get back from the government sounds harmless. But fees can make tax refund anticipation loans a much more expensive option than just waiting for your refund to arrive.

In 2006, a $200 refund anticipation loan would have carried the equivalent of up to a 700 percent annual interest rate when fees were included, according to a report by the Washington-based Consumer Federation of America. Even after a regulatory crackdown, research from the National Consumer Law Center showed lenders slapping annual rates of as much as 149 percent onto these very short-term loans.

After banks stopped making such loans a few years ago, their numbers fell dramatically -- 100,000 of them were issued in 2013, down from a peak of 12.7 million in 2002, according to the Consumer Federation of America. But payday lenders and other nonbank companies, like tax preparation firms, still offer them, along with a newer type of loan known as a refund anticipation check. Over 21 million taxpayers sought one of these high-cost products in 2012 and 2013, paying $55 to more than $200 for the privilege, the consumer group says. And there's a risk involved.

"There is the possibility that the [borrower's] refund might not come through as expected," says Carrie Houchins-Witt, a certified financial planner in Coralville, Iowa. If you still owe taxes from previous years or the IRS rejects a credit or deduction, you might end up with the equivalent of a high-interest loan and no tax refund to pay it off. If you're hankering for your refund, there are better ways to get your hands on it quickly than taking out a high-cost loan:

1. File Early

Submitting your return earlier improves your shot at a quick refund. Plus, it's nice to put that task behind you and not have to scramble in mid-April or request an extension. Houchins-Witt's clients who filed online this year got refunds in an average of eight business days, she says, and those who requested paper checks waited just three weeks -- half the time the IRS estimates it will take.

2. Get Help

If you procrastinate or avoid filling out your tax forms, ask yourself if you need help. Tax preparation software can make completing returns much easier and is even available from the IRS. The agency also offers a free tax prep services, called Free File, for those with taxable incomes under $60,000.

There are free community services, too. The IRS-sponsored Volunteer Income Tax Assistance program, for instance, offers free tax preparation nationally from IRS-certified volunteers at locations like community centers and libraries. Find one near you on the IRS website.

3. File Online

Filing a return electronically means you'll receive a refund much sooner than you would by mailing paper forms. The IRS estimates it will take three weeks or less to issue a refund after it receives a digital return; having your refund directly deposited into a bank account cuts the time further. Processing a paper return, the agency says, takes about twice as long.

4. Use Direct Deposit

To speed up your refund by allowing direct deposit, you'll need to fill out three lines (lines 76 b-d) on the IRS 1040 form with your financial institution's routing number, account type (checking or savings) and account number. You can split a refund among as many as three accounts this way. Alternatively, you can receive a refund on a prepaid debit card. This option isn't ideal, since there are fees involved, but it probably won't cost as much as a refund loan or anticipation check.

5. Embrace the Wait

While you may be tempted to get your money more quickly with a refund loan, waiting several weeks for your refund pays off.

In any case, some tax-prep companies have a 21-day wait time to receive a refund anticipation check or credit -- about the same as the IRS says it takes to process an online return and issue a refund. But some big tax-prep firms charge almost $35 for a refund credit on a prepaid card for amounts from $350 to $1,000, and almost $60 for a check, on top of the preparation fee. So that could end up costing you from 3.5 percent to 17 percent of your refund.

Are a few days or weeks worth the cost? "I know times can be tough," says Kathleen Hicks, a former Fort Worth, Texas, City Council member. Hicks fought against payday lenders for seven years as a council member for a district where many unbanked residents lived paycheck to paycheck, and she strongly discourages the use of borrowing against an anticipated tax refund. "Stay the course, and think about the fact that many times people end up owing a lot more than they borrow," she says.

Still feeling impatient? You can track your refund with the IRS's Where's My Refund? program or with its smartphone app IRS2Go.

To avoid waiting for a big tax refund next year, adjust your W-4 tax-withholding form so your employer can deduct the right amount of income tax. Brian Devers, a certified public accountant with Lovelace, Norvelle & Mathews in Forest, Virginia, recommends this step, which can mean bringing home more of your earnings. "It will be like getting a pay raise," he says.