Why Instant Tax Refund Loans Are a Bad Idea

Everyone loves to get a huge tax refund. Young low-income families and single parents who are "head of household" look forward to the return of their hard earned money in the form of "earned income" and dependent child-care tax credits. When money is tight, it is hard to be faithful to a savings plan for vacations and it is easy to see why letting the government hold it for you until tax time may seem appealing to some. Having Uncle Sam holding your tax overpayment with no interest is bad enough (you should probably claim more deductions up front), but when the tax preparers add on an additional expense so that you can see your return in a matter of days, things can turn ugly.

A Tax Refund Loan is still a loan against your tax refund. If for any reason it has been improperly figured, you may end up getting less and owing more.

A Tax Refund can be done by you personally, expeditiously online. This means that you could get your refund back just about as quickly as someone else can do it for you. Why borrow against it?

A Tax Refund is not earnings, a windfall, a gift, the lottery, or an inheritance. It is overpaid taxes....which you should probably have not had withheld in the first place. Talk to a tax advisor about adding on an additional dependent, tax deductions or less withholding, so that you have more cash in your pocket each payday. Two excellent ways of doing this is 1) put as much as you can into an Employer's IRA account which deducts off the top of your paycheck and gives you a tax incentive; or 2) put money into an Employer's Medical Expense plan if they offer one. These are those accounts that help pay for glasses, dentist, etc. but which you need to use or lose by the end of the year. Oftentimes, these kinds of plans reduce your taxable income each payday.

A Tax Refund might be garnished by someone else. If you owe back taxes, student loans, child support or some other governmental agency, remember that they might very well garnish what you thought you had coming to you.

Finally, what's the rush? You waited all year for the refund, why pay someone else for the privilege writing you a loan against money you know is coming anyway?