Rapid tax refund: Why Americans use this time-saving tax move — but you should probably avoid it

In 2017, tax filers will get an average refund of $2,840 from the IRS. If you're one of the millions of people getting a big fat check from Uncle Sam, you probably can't wait to get ahold of all that sweet, sweet cash. 

Unfortunately, the IRS takes it's time in sending your refund. The agency says it issues most refunds within 21 days, but some take longer. Plus, as the IRS reminds you, you must "take into consideration the time it takes for your financial institution to post the refund to your account or for you to receive it by mail."

You probably don't want to wait. Who does? So when your tax preparer offers you a rapid refund or instant refund, it's really tempting to take them up on it. The problem: You'll pay big to get your cash a little sooner. 

What is a rapid refund?

When you get your taxes done by a tax preparer and find out you're owed a refund, the preparer may ask if you want to get your refund right away. This is a so-called rapid refund, although some tax preparers use different terms like an instant refund, Refund Anticipation Check or Refund Anticipation Loan. 

Here's how it works: "When a taxpayer receives a RAL, the tax preparer lends the taxpayer the amount of their tax refund less the cost of interest and fees for the loan. When the government sends the actual refund check, it is directly deposited into the bank that made the loan," according to the Wisconsin Department of Revenue. However, if your refund is docked for unpaid parking fees or child support, you're still on the hook for the remainder of the loan.

Where can you get a rapid refund?

You used to be able to get rapid refunds almost everywhere, but for a while they were scarce. "By 2012, such loans had become nearly extinct after a regulatory crackdown that forced most major banks out of the market. Consumer advocates, who had seen the loans as predatory, were thrilled," according to the New York Times. 

Now, they're back. H&R Block is offering a refund advance of up to $1,250 for the first time in six years. Jackson Hewitt and Liberty Tax Service are each offering up to $1,300 in refund advances. 

Although these products are "really, truly, no-hidden-fine-print free," according to the New York Times, they're still a bad deal in most cases, because of the fees that are disclosed.

How much do rapid refunds cost?

Rapid refunds used to cost a fortune, with fees on the refund loans resulting in effective interest rates exceeding 100%. "This would often amount to several hundred dollars for those who got large refunds, dollars that were sorely needed by low-income filers to pay bills and stay afloat," according to Investopedia. 

While today's rapid refund loans don't necessarily carry these exorbitant fees — H&R Block, for example, offers a free refund advance of up to $1250 — they're still usually a bad deal for filers. The big problem now is that the tax preparers who offer these fees use them to entice you to take advantage of their filing services, which can be way more expensive than other alternatives.

"Customers who qualify will be advanced a portion of their tax refund within a day or so, with no fees or interest, though they will still need to pay for the provider’s tax preparation services, which can cost hundreds of dollars," according to the New York Times. 

How can you get your tax return as fast as possible?

You don't have to depend upon a rapid refund to get your money back quickly. There are options which should cost you less.

"Abandon the traditional paper return and file from your computer. You'll get the money almost as fast as you would with a refund anticipation loan and get it without paying any loan fees or interest," recommends Bankrate. You can even do your taxes for free with TurboTax, Credit Karma and the IRS.

Want your refund fast? Sign up for direct deposit, rather than waiting for a paper check to arrive in the mail.

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