The Truth About Refund Anticipation Loans

It sounds like a good idea. You need your federal income tax refund for something important, and you need it as quickly as possible. The person or organization that has prepared your tax return has offered you a Refund Anticipation Loan (RAL), under which you will receive a loan for the amount of your tax refund. You will you have to pay back the principal, along with interest and fees. What you may not realize, however, is that the interest rate on a Refund Anticipation Loan can be from 67% to 774% of the average annual interest rate for a loan repayment, and that can hurt anybody, especially Senior Citizens. Sometimes a tax preparer will not tell you that the loan is for a full year, not the two weeks it takes, on average, to get a tax refund, if filed electronically.

The New York City Department of Consumer Affairs (DCA) said that a person getting a RAL of $500 for 11 days-the average time it would take to get a refund if a tax return was filed electronically-would have to pay an additional $197 for the loan. That would include an interest rate of 522%, which amounts to $30,a tax preparation fee, which includes a "peace of mind guarantee" for $129, and a tax filing fee of $38. Despite the tax filing fee a tax preparer may charge you, it will not charge him anything to file electronically for you.

In 2002 the DCA filed charges against H&R Block for not obeying a city law that requires tax preparers to inform taxpayers about alternative methods of getting refunds quickly.

As a result of the suit, H&R Block agreed to pay 62,000 New Yorkers $4.2 million in restitution. The taxpayers will receive vouchers that can be used for services at H&R Block, or can be redeemed. Although the company never admitted guilt in the suit, it did promise, as a part of the court agreement, to offer educational programs to clients.

There are many consumer advocates that are critical of the Refund Anticipation Loans, because they can hurt those who can least afford the high interest rates, including Senior Citizens. In fact, discouragement of RAL's is one reason the Internal Revenue Service this year will allow taxpayers to split refunds, if they desire, into one, two, or three accounts, such as checking, savings, and IRA's. Refund Anticipation Loans can be for up to $5,000, so imagine the interest and fees on that high of a loan.

"It's an outrageous rate for a really short term loan, which, by the way, is a fairly low risk to the lender, "according to Chi Chi Woo, a staff attorney for the National Consumer Law Center. Wu said the IRS helps flag taxpayers who represent a higher risk, so that decreases the risk for the tax preparer. Wu said the amount of money taxpayers would have to repay would not be so bad if it were for a one or two year loan, but it is outrageous for a ten day loan.

Tax preparers are not the only ones who offer the RALS's. Car dealers offer the loans toward down payments. Check cashing services, Internet sites, retailers, and tax-software companies offer the loans, in an attempt to generate more business. Many Refund Anticipation Loan opponents believe the loans hurt not compulsive buyers the most, but the working poor, and no doubt Senior Citizens often also do not have money to spare.

In 2004 12.38 million taxpayers got Refund Anticipation Loans, compared to 12.15 million taxpayers the year before. They paid $1.24 billion in loan fees, which include the high interest rates. They also paid $360 million in administrative, electronic filing, and application fees-despite the fact that taxes can be filed electronically for free.

It should also be noted that 56% of those who received the RAL's, seven million families, had received the Earned Income Tax Credit, the largest federal poverty assistance program. Many who criticize the RAL's also point out that many who receive them face education, literacy, and language barriers.

Wu said that some people who get the Refund Anticipation Loans borrow $2,000-$4,000 and can't pay back the loans and fees, because they live paycheck to paycheck. He said that someone getting such a loan for $2,150 would have to $900 in additional fees. Many Senior Citizens on fixed incomes or the working poor can't afford such fees to pay back for their Refund Anticipation Loans.

"Direct deposit is growing rapidly and is now used by over half of all refund filers, IRA Commissioner Mark W. Everson said on the official IRS website, www.irs.gov. He was explaining the new option to split refunds into different accounts and how he hopes that will discourage RAL's. "This program will give taxpayers the option of depositing a refund into more than one account. Split refunds should encourage saving, and we hope that will dampen the demand for Refund Anticipation Loans."

Whether or not you are a Senior Citizen, if you are considering getting a Refund Anticipation Loan, remember the high cost involved.