Beware of Tax Refund Loans
Illinois Attorney General Lisa Madigan
What Is a Tax Refund Loan?
A tax refund loan is an extremely short-term loan that you apply for through your
tax preparer, using your anticipated tax return as security. Tax preparers prefer the term “instant tax
refund” to describe these loans, but make no mistake: an “instant tax refund” is a LOAN, with all of the
costs and fees associated with borrowing money—and then some. Also, you will NOT get your refund
that much faster if you take out one of these expensive loans. They simply aren’t worth the price.
When you take out a tax refund loan, your tax preparer (working in partnership with a bank) lends you
the amount of the tax refund that you expect to get back, but charges you a significant amount in in-
terest and fees. Then, when the government sends your actual refund check, it is direct-deposited into
the bank that made the loan. Because the loan is paid back when you receive your tax refund, the term
of a tax refund loan is short—usually seven to 14 days.
Unlike a traditional loan, the interest rate (the annual percentage rate or APR) for tax refund loans is sky
high—in many cases more than 200%. Some lenders will even allow you to borrow more than the ex-
pected amount of your refund. In these cases, the high interest rate applies to the entire loan amount,
not just the amount of the refund, and can quickly snare you in a debt trap. Consumers who borrow
beyond their refund at these high rates are at risk of not being able to pay back the loan.
Tax preparers pack these loans with numerous fees to drain as much revenue as possible from consum-
ers. To obtain a tax refund loan, consumers typically pay a loan fee, an electronic filing fee, a document
preparation fee, and a tax preparation fee. After receiving their loan, consumers often must pay an ad-
ditional fee just to cash their loan check.
Who Takes the Hit?
According to a study by the Consumer Federation of America and the National Consumer Law Center,
taxpayers lost nearly