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Tax refund advances: are they a good deal?

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By JANE PROCTOR

This tax season, many tax preparers will advertise instant money through tax refund advance services.  In reality individuals who receive a tax refund advance are borrowing money at a very high price. A tax refund advance is a short-term money advance, similar to a payday loan. Both tax refund and payday loans are some of the most expensive ways to borrow money. The Consumer Action website, reports annual percentage rates as high as 774 percent for tax refund advance loans.  
If you receive a tax refund advance, you are using your tax refund to guarantee the loan. You sign a form allowing your refund to be deposited into the issuers, most likely the tax preparers, account.  The tax preparer then writes you a check for your anticipated refund minus any fees. If the actual refund is less than actually anticipated you still must repay the loan. If this happens, you will also probably owe additional fees and interest.
The biggest selling point to a tax refund advance loan is speed. But how much faster do you really get your money?  The answer really depends on how your tax return is filed. A paper return typically takes six weeks to process, while an electronic return is normally processed in three weeks.  If you sign up for direct deposit, you can anticipate your refund one week faster than if you request a paper check.

So, ask yourself if receiving your refund two weeks faster is worth paying the fees and interest of a tax refund advance loan. In most cases a tax refund advance loan should be considered a last resort for cash. Consider all other available options for cash before signing up for a tax refund advance loan, such as a personal loan from the bank or store financing. In many cases even credit card cash advance fees are less expensive than tax refund advance loans.References: 
Federal Citizen Information Center, U.S. General Services Administration. Retrieved Oct. 9, 2010 from http://www.consumeraction.gov/caw_credit_loans.shtml.
Ten Things You Need to Know About Tax Refunds, Internal Revenue Service, Retrieved Oct. 9, 2010 from http://www.irs.gov/newsroom/article/0,,id=108680,00.html.
Get Your Refund Faster, Internal Revenue Service, Retrieved Oct. 9, 2010 from http://www.irs.gov/individuals/article/0,,id=163764,00.html
Source: Jennifer Hunter, Extension Specialist for Family Finance, University of Kentucky, College of Agriculture.

Jane Proctor is Trimble County’s Cooperative Extension agent for family and consumer services.