3 Smart Ways to Use a Tax Refund Loan

Looking for a faster way to get your tax refund? It might be possible with a tax refund loan.
This particular financial device is formally known as a “tax refund anticipation loan” and often abbreviated as RAL. 
There’s a reason for the “anticipation” portion of that title. The amount of your tax refund, when calculated by a tax preparer, is an estimate, not a final return number. There are factors which may alter it before you get your refund, such as back taxes or child support owed.
The RAL that you take out against your tax refund will become new debt if your final tax return number comes in at a lower amount than the loan. If you’re uncertain about the final figure of your refund, this may not be the best option for you.
The Best Ways to Use a Tax Refund Loan
After a year like 2020, it’s likely you have a lot of ideas as to where that tax refund could go. Here’s how you can get the most out of your early head start on your taxes.
Smart Alternative #1: Pay off High Interest Credit Card Debt
Credit card interest compounds daily. One of the most compelling reasons to take out a tax refund loan is to pay off credit card purchases made over the holidays. You could just wait for the actual refund, but every day is another day of compounded interest payments.
Another option here is to hold off on holiday spending and do all major purchases with money from a tax return loan. TVs, mattresses, and fitness gear typically go on sale in January. Buy them with a tax refund loan and skip credit card interest payments.   
Smart Alternative #2: Open a Roth IRA
Tax refunds and tax return loans are after-tax money, so you can invest them into an after-tax savings vehicle. That’s what a Roth IRA is. It’s an individual retirement account for depositing money you’ve already paid taxes on. Using your loan to open one is a great way to put your tax refund loan to work for you.
Why not just wait for the tax refund instead of taking out a loan against it? Roth IRAs earn interest and dividends. Every month that you wait is potential lost earnings. January and February are usually big months for annual earnings statements, so you’ll want your account open for those.  
Smart Alternative #3: Pay Off Your Auto Loan
According to Bankrate, the average APR on an auto loan in 2020 has ranged anywhere from 3.65% to 11.92%, depending on credit score. Paying off any portion of your vehicle financing with a tax refund loan could save you several hundred dollars in long-term interest payments.
This alternative is similar to the credit card idea above, but the added benefit is that you’ll be closer to owning your vehicle outright. Do you have any other major purchases or one-time payments that fall into this category? Paying one of them off is a smart idea as well.
Downsides to a Tax Refund Loan
Before you make any final choices on how to use a tax refund loan, it’s important to be aware of a few potential pitfalls.
Tax refund loans can come with fees and interest rates: Tax refund loans aren’t free money. Depending on who issues your loan, it can have various fees attached and charge some amount of interest. That means a tax refund loan can be useful for paying off high-interest debt like the types of debt listed above, but might not be worth it for low-interest debt such as student loans or a mortgage.
Your loan amount isn’t finalized: If your final refund amount turns out to be lower than what’s anticipated by your tax preparer, the difference will be debt that you have to pay down. A tax refund loan isn’t the best choice if you’re not sure about your final refund amount.
Notice: Information provided in this article is for informational purposes only. Consult your financial advisor about your financial circumstances.
Source: iQuanti, Inc.