Let’s say your employer offered to pay you 7 days early, every pay period for only a small fee of $30. Quickly running the numbers for a weekly paycheck of $800, this equates to an annual percentage rate of 195%, yes I did not misplace a decimal, 195%! Under normal circumstances, no one would ever accept this deal from their employer to have their money only 7 days early. Unfortunately every year around tax season millions of taxpayers do just that!

These “tax refund loans”, also know as “instant refund loans” or “refund anticipation loans”, have been promoted by H&R Block (HRB) and Jackson Hewitt (JTX) and other tax preparation services in recent years. Impatient taxpayers accepting tax refund loans pay anywhere from $30 to $90, not including the regular cost of tax preparing and filing. According to the Consumer Federation of America these loans cost the 9 million people who accept them about $900 million in loan fees. Depending on the amount of the refund and the loan fees, the annual interest rates of some of these loans can reach 2000%

The True Cost

The average tax return is about $2000. Assuming you could find a savings or money market account with a generous interest rate of 4%, you would make a whopping $1.53 in that extra 7 days you would have your money. Of course that $1.53 has already cost you at least $30 in loan fees.

And don’t forget about the opportunity cost of losing that $30. Let’s say that instead of opting for the tax refund loan, you put that $30 in the same savings account as above with the generous 4% interest rate. And let’s say you do this each year for 20 years. After twenty years you would have saved $600 by not opting for the tax refund loans, but your savings account would total $919.99! (See for yourself with our compound interest calculator). So in this case the opportunity cost is $319.99!

Get Your Money Faster Anyway

There are still ways to get your tax refund faster without paying outrageous loan fees. One way is to just file your taxes as early as possible. Most employers send out their W-2s by the end of January, so have the rest of your information together and ready to go when your W-2 arrives.

Another way to speed up your tax refund is to file electronically. The IRS says that for tax returns filed by mail, refunds will be sent within 6 weeks, while refunds for those that filed electronically will be issued within 3 weeks. Many people will qualify for free e-filing as well. For more information about how long your refund will take, see the official IRS topic about Refund Information.

Another way to get your money earlier, is to adjust your income tax withholding during the year so that you receive more of your money each paycheck instead of overpaying and receiving a tax refund. You can do this by updating your W-4 form with your employer. Please note that if you reduce your withholding too much, you will end up writing a check to the IRS instead of receiving a refund, not that this is a bad thing since you’ve received all of your money each pay period. But if you receive a decent sized refund every year of at least $1000, you should be able to reduce your tax withholdings and still receive a small tax refund at the end of the year.