Tax Refund Anticipation Loans

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Around the beginning of every year, we begin to hear advertisements from tax companies about getting tax refunds quickly. Different terms are used by the various tax refund preparers, such as "Rapid Refund", "Fast cash Refunds" "Express Money" or "Instant Refunds." While we all hope to get something back for all those taxes we have paid or anticipate the extra help that comes from the Earned Income Credit, the tax refund anticipation loans may not be the best route to take.

In reality, a taxpayer is taking out a VERY expensive loan to get their money just a few days sooner. According to National Consumer Law Center and the Consumer Federation of America, in 2004 consumers paid almost $1.24 billion in loan fees and another $360 million in administrative, electronic filing and application fees. Fifty-six percent of the consumers paying that money were poor working families who qualified for the Earned Income Tax Credit.

What is a Tax Refund Anticipation Loan?
This is a loan you get based upon the tax refund you expect to get. Generally, you pay a tax preparer to do your taxes, file the taxes electronically, and then get a loan for the amount of your expected tax refund. When your tax refund comes in, you repay the loan. The loan can come from the tax preparation company or from some other company.

Essentially, you are borrowing against your own tax refund money at a very high interest rate. Unfortunately, the people who often need their tax refunds the most - low to moderate income workers - are the very people who have the most to lose by taking out a tax refund anticipation loan.

How much does this kind of loan cost?
A Tax Refund Anticipation Loan can be very expensive. There are usually tax preparation fees, loan fees, and electronic filing fees. All of these fees are being charged for a loan that will probably last for a maximmum of 10 days (until you get your tax refund). The actual fees for the loan may be as much as $30 to $90 which translates into Annual Percentage Rates of 60% to 700%.

Consider the following scenario:
A taxpayer gets a tax refund of $2000 and obtains the refund through a refund anticipation loan

RAL loan fee: $ 75
Electronic filing fee: $ 40
Fee paid to tax preparer for filing taxes: $100
-----
Total: $215

The total of $215 is over 10% of the taxpayer's refund and includes an annual percentage rate of 142% if it beats the IRS by 10 days. For many low income taxpayers, $215 is groceries for a month, or a car payment, or payment of a medical bill, given up just to get their money a few days earlier. Many times these loans are also now on "debit cards" and you must pay a fee to withdraw your money from the card. For instance, one card charges $24.95 to sign up for the card. The cardholder is then allowed one free cash withdrawal per month. After that, there is a $1.50 charge for each withdrawal - not including the charge that a bank may charge in foreign ATM fees.

What happens if my tax refund in taken to pay child support or another debt?
When you agreed to take your money a few days early, you agreed to a loan with a bank in partnership with the tax preparer. The loan must be repaid under the agreed upon terms, even if your return is denied by IRS, taken to pay some other debt or the refund is delayed. If you do not pay back the loan, the lender can obtain repayment of the loan by any legal means, including filing a legal action against you and reporting your non-payment to credit reporting agencies.

What else can I do to get my refund quickly without paying so much money?
E-File with Direct Deposit - You can file your tax refund electronically to speed up getting your refund. If you go to www.irs.gov, there is a list of websites that will allow low income taxpayers to file their tax refund without paying a fee. If the money from your tax refund is direct deposited into a bank account, you can get a refund in about 10 days without paying one extra cent. Get a bank account - If you don't already have a bank account, open one up to take advantage of direct deposit.

You do not have to wait for a paper check to be mailed to you. Wait just a few days - Do you really have to get cash from your tax refund TODAY? If you save over $100, can't you wait a few days? If you have an urgent bill to pay, ask for more time until the tax refund check comes from the IRS. Does it really make sense to lose money to pay an old bill? Avoid check cashers - Check cashers charge an extra fee to cash RAL and tax refund checks. The same applies to the cards currenlty used by some of the major tax preparer companies. Find a free tax preparation service - Every year VISTA will set up sites around the country to assist low-income taxpayers with their tax refunds. AARP also offers such services in many communities.



Reviewed August 2009