Refund Anticipation Loans -- More Harm than Help

If someone offered to give you a loan for $2100 at interest rates of up to 222 percent you’d probably laugh at them and walk away; but, this spring, 1 in 10 Americans will do just that: for the privilege of borrowing their own money, over 12 million tax filers will pay interest rates as high as 744 percent to borrow their own money thru refund-anticipation or “rapid refund” loans.

Refund anticipation loans are short term, high interest loans that commercial tax preparation services offer to taxpayers as a way for filers to get their tax refunds faster -- typically 1 to 2 days. The loans are secured by the filer’s anticipated tax refund and ordinarily last no more than 10 days.

Refund anticipation loans are commonly called as predatory lending by consumer rights advocates who say that they cost working poor taxpayers over $500 million a year.

According to estimates by the Consumer Federation of America and the National Consumer Law Center, in 2004, a refund anticipation loan recipient would have paid about $250 to get a $2100 refund loan from a commercial tax preparation chain with interest rates of about 182 percent annual percentage rate (APR).

Consumer watchdogs believe that commercial tax preparation services that offer refund-anticipation loans are targeting low income taxpayers and Earned Income Tax Credit (EITC) recipients: IRS data shows that EITC recipients are 55 percent of refund-anticipation loan recipients.

“The EITC is meant to give a boost to hard-working, low-income Americans. Tax preparers and banks are eating away the value of this program, taking money that could be otherwise used to pay bills or build a nest egg for a home or education,” stated
Chi Chi Wu, NCLC staff attorney. The EITC program, the nation’s largest anti-poverty program, was enacted in 1975 to help low wage workers. Recipients get a large percentage of their federal withholding refunded to them to help lift them out of poverty.

Why would someone pay such high interest rates to borrow their own money when the IRS can return their money in as little as 10 days if they file electronically?

For many working poor, like Mary Carter, it’s the all too common issue of needing money to make ends meet. Carter paid H&R Block $218 out of her $760 refund to get a Rapid Refund loan.

” I needed some money right away," said Mary Carter in an interview with the Chicago Reporter. "I've always known it wasn't a good deal because that's too much…, but if you need money, all you see is that money coming back in a day or two that you can use right away.”

Cash strapped or not, it just doesn’t make sense to pay hundreds of dollars to borrow your own money especially when there are a number of free ways that filers can speed up their refund from the IRS.

The easiest and least costly method to get your money from the IRS is to change your income tax withholding on your W-4 with your employer. Your tax refund is based on money withheld from your pay during the year. If you consistently receive a large refund at the end of the year, you should consider changing your income tax withholding during the year so you’ll receive more of your paycheck throughout the year. There’s no sense in giving the federal government a free loan if you can avoid it.

If you don’t want to change your income tax withholding but would like to get you refund quickly at the end of the year, file your income tax electronically and have your refund deposited electronically into your checking or savings account -- it usually takes about 10 days. Electronic filing has become easier over the years and for many tax payers it’s free.

In 2002, the IRS implemented the “Free File” program that allows millions of Americans to have their tax returns prepared and filed for free. The IRS partnered with 17 companies to provide the service to tax filers. You’ll need to meet certain eligibility criteria and have internet access. For more information visit the Free File section of the IRS website at http://www.irs.gov or “Google IRS + free file.”

If your income is less than $35,000 you can get free help filing your return from the Volunteer Income Tax Assistance program (VITA). VITA provides tax preparation for free throughout the nation and many VITA sites can file your return electronically. To find a site near you, call 800-829-1040.

Companies like H&R Block and Jackson Hewitt make millions each tax season from unwitting taxpayers by appealing to their need for money to pay pressing bills. They offer quick money to help the working poor, but, in reality, all their doing is fleecing those who can least afford it.

Be money smart and fill your return for free and let the IRS deposit your return into your checking or savings account. The wait can save you $200 or more.