When you know you have money coming to you, being patient can be difficult. As you visualize all the opportunities for how to use this pending receipt, you start to wonder how you can get it sooner.

When you file your taxes, there’s a tool for getting your refund sooner: It’s called a tax refund advance. It’s effectively a loan against your anticipated refund.

Many companies offer them because they have relatively low risk compared with other loans. The lender sees your anticipated refund as calculated by a tax preparer and knows the government always pays the money it owes.

While these loans offer a way to get what you’re owed sooner, be aware that not all that glitters is gold. These products often come at a cost.

How Does a Tax Refund Advance Work?

Tax refund advances offer nearly instant access to cash as you wait to receive your tax refund. They’re effectively a short-term loan against your future tax refund, providing liquidity until the IRS decides to issue your return.

After reviewing your tax return and identifying your anticipated refund, a lender will originate a loan that’s usually in line with how much you want to borrow and your expected refund. Then, they’ll extend this credit until the IRS issues your refund. At that time, the lender will claim the amount to satisfy the outstanding loan. The remainder of the refund will be transferred to you.

Some commonly used tax-preparation companies that are offering tax refund advance loans this year include H&R Block, Jackson Hewitt, and TurboTax.

While the amounts available vary by company, the refund advance amounts go as high as $4,000. The lowest available loans are $250 without interest or fees. These lower amounts tend not to carry interest charges or fees. They serve to entice you to prepare your taxes with one of these companies.

Some offer very small loan amounts before the tax year ends with sufficient documentation from the current year and last to support the need for an early refund advance loan. For example, at Jackson Hewitt, you can receive up to $700 before your W-2 arrives so long as you can provide a valid proof of income, e.g., a paystub.

Pros and Cons of a Tax Refund Advance

The pros and cons of these financial products can help you decide whether they make sense for your financial needs. More details about each below.

Pros Quick access to your money.
Some refund advances really are free.
No impact on credit.

Cons

• Funds are often transferred onto branded credit cards.

• It doesn't make sense if you have savings.

• True costs are often higher than they appear.

Pros

Quick Access to Your Money

If you’re in a cash crunch, having ready access to your money can come in handy. Instead of being forced to wait for three to four weeks to receive your refund through direct deposit or a check in the mail, you can instantly receive money through various payment methods like branded debit cards. The loan is then repaid as your refund comes into your possession.

Some Refund Advances Really Are Free

In this instance, one of these products might make sense. However, be sure to read the fine print to make sure it really is free and also to find out how you receive the funds.

No Impact on Credit

Applying for a refund advance loan doesn’t impact your credit score.

Cons

Funds Are Often Transferred Onto Branded Debit Cards

Some lenders require the funds to be transferred onto branded debit cards, limiting your ability to use the funds in some instances.

Normal debit card transaction fees, e.g., ATM withdrawal fees, still apply as they would for any debit card used at a non-member bank.

For instance, with TurboTax if you apply for a refund advance loan with the loan proceeds placed on a branded debit card for an amount less than your refund, after the refund is processed, the remaining refund goes on to the branded credit card as well. This is something to keep in mind with how your total refund will be affected.

Alternatively, you can often have the loan transferred to your bank account, though this service may come with additional fees.

It Doesn’t Make Sense if You Have Savings

You’ll typically receive a portion of your owed refund within 24 to 48 hours of applying for a tax refund advance. But the IRS rapidly processes tax returns. It usually remits any qualified refund within a few weeks of filing.

If you have a financial cushion capable of lasting until the refund comes in, borrowing that money makes little sense.

True Costs Are Often Higher Than They Appear

While fees and interest charges may appear small relative to the size of the loan, their true cost can be similar to or exceed credit card financing.

For example, Jackson Hewitt’s Go Big Refund Advance lets you borrow up to $2,500 for new clients and charges 2.5% fees on the amount you borrow. (Jackson Hewitt also offers Early Refund Advance loans of $200 to $1,000 and No Fee Refund Advance Loans of $200 to $3,500 without fees.)

If you applied for a $2,500 loan under the Go Big Refund Advance program and incurred a 2.5% fee, you would in effect pay $2,563 back on the loan.

The interest you’ll often see quoted is assessed on a monthly basis. Interest rates of 3% to 5% are often advertised, but viewed on an annual basis, this translates to a 36% to 60% APR.

Should You Get a Tax Refund Advance Loan?

While these loans represent useful tools for providing liquidity, they can often come with exorbitant costs. However, not all will cost you. Sometimes, they can actually provide a more expedient ability to use the funds — though access is limited because it comes through a debit card.

When you plan for your cash flow needs, you may see a tax refund as a self-induced bonus on your earnings because you receive a decent check from the IRS. However, viewed differently, you’re also shortchanging yourself throughout the year because you effectively provide interest-free financing to the federal government. The money you receive back from the IRS represents money you overpaid during the tax year.

Instead of aiming for a tax refund each year, a better planning method would be to adjust your withholding rate to minimize the amount you pay out of each paycheck. You’ll get those funds you would have otherwise received as a refund in your hands as you get paid.

Riley Adams is a CPA who is originally from New Orleans and works as a senior financial analyst at Google in the San Francisco Bay Area. He also runs the personal finance website Young and the Invested, which is dedicated to helping young professionals explore financial independence and entrepreneurship.

This was originally published on The Penny Hoarder, which helps millions of readers worldwide earn and save money by sharing unique job opportunities, personal stories, freebies and more. The Inc. 5000 ranked The Penny Hoarder as the fastest-growing private media company in the U.S. in 2017.

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