Should You Get A Tax Refund Loan To Pay Off Debt?

If you feel as though each month has you falling further and further behind financially, you may anxiously anticipate the receipt of your income tax refund so that you can pay off some bills (or debt). And when you're receiving notices of late payments right and left but still waiting for some crucial tax documents, you might wonder whether applying for a tax refund loan is a better idea than waiting -- even if it reduces the ultimate amount you're scheduled to receive. Read on for some of the factors you'll want to consider when debating whether to take out a tax refund loan to pay off debt. 

Should you take out a tax refund loan?

These types of loans are similar to payday advance loans in that they are available to most consumers – regardless of credit history – based on a finite and somewhat guaranteed source of income. By bringing in your W2, 1099, or other tax documentation to a company that specializes in these loans, you'll be offered a portion of your expected tax refund in cash. When it comes time for repayment of this loan, you'll simply sign over your refund to the lender.  

Because they're available to just about anyone who receives an income tax refund, regardless of credit, tax refund loans can be advantageous for those who are facing immediate and severe financial crisis – for example, a final notice that your utilities are to be disconnected or a notice of eviction or complaint of foreclosure. 

However, those who simply want these funds in order to pay off high-interest debt (like credit card debt) may find that the interest and fees associated with tax refund loans actually exceed that of most credit cards, making it a more cost-effective solution to simply stick with your original payoff plan and throw your tax refund at this debt once you receive it.  

What are your alternatives if you decide against a tax refund loan?

If you decide that a tax refund loan isn't the right choice for you but would still like some way to free up some cash in the short term, you may want to investigate a personal loan. These loans can sometimes have more stringent credit requirements than payday advances or tax refund loans, but also have much lower interest rates and more favorable repayment terms, allowing you to stretch out repayment over a lengthier period of time.