With tax season around the corner you might have noticed a deluge of Jon Hamm commercials for interest free tax refund advance loans. This is a newer product used by tax preparation firms to build their customer base around tax season.
H&R Block, Jackson Hewitt, Liberty Tax Service and more recently Credit Karma all market interest free advances on your tax refund. The process is simple and the loans are paid back to the tax preparer when your refund comes back from the government.
The process for tax preparers differs slightly from firm to firm. You first need to make an appointment with a tax professional and go into the office since the product is not available online. Credit Karma’s Earlybird Advance product is the only one to offer the advance online. After completing your refund you will then have the option to fill out a refund advance application.
The refund advance application goes through an underwriting process at a partner bank. In the case of H&R Block their prequalification process reads: BofI Federal Bank, the lender for Refund Advance, will evaluate whether you are eligible to apply for the Refund Advance loan based in part on your tax situation from last year and certain eligibility criteria determined by the bank. This offer is not guaranteed, so if your tax situation or other relevant inputs change, your prequalification to apply could change.
The marketing for these loans promise fast cash in the amount of up to $3,000. While that amount is possible applicants are more likely to see far less. Loan amounts can range from $100 to $500 on the lower end to $2,500 to $3,275 on the higher end. Most applicants looking for fast cast after the holiday season tend to use their refunds to pay down debt.
Funds can be applied to a prepaid card for same day use or you can choose direct deposit and get your advance in a day or two. Americans typically have to wait about three to four weeks to get a tax refund from the IRS, while Americans who take the Earned Income Tax Credit or the Additional Child Tax Credit won’t get their refunds until Feb. 27.
While no origination fees apply, nor is there an APR, applicants can expect to be charged by the tax preparation firm for completing the tax refund. As personal finance columnist Susan Tompor points out, when factoring in the cost of preparation and the amount of your refund you will need to ask if the product is right for you.
I don’t think we will see any of the major online lending platforms offering a similar service but it is an interesting new development nonetheless.
Todd is the host of PitchIt: the fintech startups podcast, a weekly interview show featuring emerging fintech founders and leading venture capitalists. He is responsible for leading the content team which covers fintech through daily & weekly email newsletters, editorial, virtual events, and in-person conferences. He has been covering fintech, banking, and venture capital for more than 15 years, including speaking regularly at industry events.