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The Basics

Savvy alternatives to tax refund loans

Don't let the urge to splurge -- or the need for a new refrigerator -- tempt you into expensive borrowing so that you can lay your hands on your refund a few days sooner.

[Related content: taxes, tax refund, IRS, debt, financial planning]
By Bankrate.com

Just discovered you'll be getting a tax refund? Don't let your enthusiasm to spend that unexpected money get the better of you.

Thanks to today's technology, there's really no need to pay extra for a refund anticipation loan just to get your hands on your tax money a tiny bit sooner. If instant cash is more a desire than a need when considering a quick refund, consider these alternatives:

Go electronic

Abandon the traditional paper return sent via the U.S. mail and file from your computer. In 2008, nearly 90 million taxpayers filed their returns electronically. You'll get the money almost as quickly as you would with a refund anticipation loan, and you won't pay loan fees or interest.

In fact, you may not need to pay for anything. An Internal Revenue Service partnership with tax preparers and software companies offers free online tax preparation and e-filing to some taxpayers. The IRS says that whereas paper filers could wait up to eight weeks for their refunds, most electronic filers can expect their tax checks to show up in their mailboxes in half that time or less. The agency also points out that the error rate is less than 1% for electronic filers.

Direct deposit

Electronic filers who opt for refund direct deposit do even better(.pdf file).

The IRS says the money generally shows up in taxpayer bank accounts in 10 to 14 days. Even if you file the old-fashioned paper way, having your refund deposited directly into a bank account cuts the time you have to wait for your tax cash. Plus, it's added protection against lost or stolen refund checks sent through the mail.

Use store financing

If you want your refund to finance a must-have new appliance, store interest rates usually will be better.

Many stores offer free financing for limited periods. By then, the refund should have arrived, and you can use it to pay off the store credit -- and pay no interest at all.

Impatience usually wins

Ultimately, a refund anticipation loan is a personal preference, not a fiscal issue for taxpayers.

"Theoretically, with electronic filing and quicker turnaround on refunds, the need for tax-anticipation loans has become obsolete," says John L. Stancil, an associate professor of accounting and tax at Florida Southern College in Lakeland. "However, my observation is that they appear to actually be on the increase, as people become more and more impatient to get their refund.

"One sample I saw from a major company who provides these loans through tax preparers disclosed an annual percentage rate of 264% on the loan. All year long, taxpayers have made the government an interest-free loan, and now they are paying 264% to get their own money back a few days quicker."

Companies that offer refund loans, such as H&R Block, are well aware of such impatience, and that's why the loans survive even as electronic filing increases.

The tax-preparation giant notes on its Web site, "Taxpayers choose refund anticipation loans because they can receive money in one to two days, compared to waiting up to 15 days for a tax refund to be directly deposited into their existing bank account or three to eight weeks for a mailed IRS refund check."

That pitch definitely appeals to those who value speed over cost.

Recently, larger tax-preparation companies have been offering these impatient customers refund anticipation loans on easy-to-use prepaid debit cards. The ease of a debit card coupled with the draw of an "instant refund" tempt customers looking for a speedy return.

Video: Our tax expert demonstrates his filing system

With all the pluses of these promises, many customers fail to see the charges incurred for their impatience. These expenses include tax-preparation fees, account fees and finance charges, as well as the fees of the debit cards, which include charges for ATM withdrawals and balance inquiries.

But if you can squelch your refund appetite for just a few days, then you -- and your bank account -- will be better off.

This article was reported by Kay Bell for Bankrate.com.

Updated Dec. 4, 2009

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