A tax refund goes a long way for many Americans. Whether you add your refund to a high yield savings account, pay some bills, or treat yourself to a new purchase, millions eagerly anticipate the day the tax refund arrives. For some, however, the tax refund check is bitter sweet. There were an estimated 8.4 million low to moderate-income taxpayers who wasted a collective $806 million for immediate access to their refunds in 2008, according to a report by the Consumer Federation of America and the National Consumer Law Center.
Consumers squandered this money by taking out short-term, high-cost refund anticipation loans, or RALs. Although these loans give consumers access to their money in one to two days, they will pay fees with effective annual interest rates that run well into the triple digits. According to this recent report published by two leading consumer advocate groups, the APR on a 10-day tax loan of $300 is nearly 500 percent, while the APR for a typical RAL of $3,300 is 72 percent.
Here’s how the loans normally work. Consumers pay H&R Block, Jackson Hewitt or other tax preparation companies to manage their returns. These preparers, which have partnered with banks, arrange for the filers to secure 7-to-14 day loans based on their expected refunds. These tax refund anticipation loans are very easy to get, which is part of their allure.
These costly short-term loans are not simply the province of shady storefront establishments. In 2009, tax preparation giant H&R Block agreed to stop marketing high-cost RALs as “early tax returns” in California. A complaint filed against H&R Block alleged a variety of deceptive practices including deceptive advertising and unfair collection practices. However, while a number of state governments have followed suit in an effort to curb this harmful lending practice, the responsibility ultimately falls on the consumer to avoid this trap.
What’s important to understand is that if you were to hold out for a little while longer, you could pocket the entire return without incurring the exorbitant cost. With direct deposit of your tax refund, the money typically gets deposited into your checking account in two weeks. The problem for many folks, however, is that they don’t have a checking account. Without direct deposit, they are left waiting six to eight weeks for their refund.
It’s an unfortunate fact that in recent years, many traditional lending institutions left the small loan market because these types of loans aren’t profitable. In their absence, a vacuum has been created that has been filled by companies offering various types of unconventional credit products. Meanwhile, as the availability of small-sum, short-term credit has dried up, many protections that once curbed abusive lending in America have been erased.
These extremely expensive credit products drain billions from struggling families and diminish their ability to purchase the products and services that need. In essence, tax refund anticipation lending tempts consumers to borrow their own money, and propels the unsuspecting into a chronic debt-spiral. This debt-spiral is very similar to the problems that chronic users of payday loans experience.
If you find yourself strapped for cash, know that you’re not alone. But the solution to the problem isn’t a refund anticipation loan. Rather, the best course of action is to file your taxes immediately. According to the IRS, if you e-file and select the direct deposit option, you will get your refund in an estimated 8-to-15 days. Given the alternative provided at no cost by the IRS, RALs are far too expensive and unnecessary to even consider.
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