Should You Get a Tax Refund Loan to Pay Your Rent?

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Should You Get a Tax Refund Loan to Pay Your Rent?

Oh My Apartment · Apr 14, 2008

It sounds like it’s too good to be true. Tax preparers will do your taxes, file them and you will get your tax refund money today. The rent is due, the credit card is carrying a balance too high and the old computer now takes over 10 minutes to boot up. The government has been holding it all year and refund time is like a holiday. April 15th should be a federal holiday and a day off work. Do they really want to stimulate the economy? Above all, that refund money is yours, you deserve it and you shouldn’t have to wait another day, right?

Well, right, right, wrong. That money is absolutely yours and the government feels that you do deserve a refund. Should you wait another day? That is your decision. Let me give you some thoughts before you do that.

Here is my little quiz to see how you feel about paying for an instant tax refund:

1. You are standing between two ATM machines. One is your bank’s and charges you $0 to use it to get your money. One is another bank’s ATM and is going to charge you oh, let’s say just $120 to get your money. Which one do you pick?

2. The credit card that you were thinking of paying down has an interest rate of 19.9% annually. For every $1,000 you borrow a year, you pay $199.00 in interest ($4/week). According to the Consumer Federation of America and the National Consumer Law Center tax refund loans can carry an interest rate as high as 2000% (yes, that was 3 zeros). The average interest rate on a $2,000 refund loan is 222.5%. That is $4,450/year or $85.57/week in interest (this doesn’t count paying any principal, I’m just talking interest here.)

Do you take the loan to pay down your credit card? By the way, before you decide, please remember that your credit card is money that you have borrowed from a creditor. The second scenario is money that you have borrowed from yourself.

3. You are standing in front of a cooler of soda. Do you pick Pepsi or Coke? Not that it really matters for this post, but I felt that I needed at least three questions and I think I already made my point with the other two scenarios.

This may not be what you want to hear because we all want our money now. We live in a day and age where we just don’t wait for anything anymore. Here is the good news. These loans that you can take out are most often 10-day loans. They are going to electronically file your refund and get this money direct deposited. You can do the same. The IRS was quoted stating that “most often” refunds are direct deposited within 10 to 14 days if you electronically file and select direct deposit as your refund option. This is also getting much easier. If you make $54,000 or less, you can prepare and file for free right on the IRS website.

You can also avoid this in the future. A refund is simply that, a refund. You have overpaid your taxes. You are the one that gave the government an interest-free loan for the year. You can lower your withholdings a little. The best case scenario is actually not getting a refund. You can get this money over the year, save it, and actually earn some interest in savings or investments. Even paying a little isn’t bad, if you are prepared for it.

Maybe you are someone that has a hard time managing money and like the fact that the government holds your money for you interest-free. Your employer may very well have a savings program or enable you to split your pay between two accounts direct deposit. How nice to have as little as $20 put into a separate savings account each payday that you will never really see! Treat that as your refund. You will be earning interest on it instead.

Thoughts on the instant tax refund (a.k.a. tax refund loan)? Share your stories below.

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