Beware Of Tax Refund Loans

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NEW YORK - How much would you pay to borrow your own money?

The smart consumer will shout, "Zero! Zilch! Nada!" but millions of Americans pay a stiff fee just to grab their federal tax refund a few days early with a "refund anticipation loan."

"The people who can least afford it sign up for these loans," says Gail Cunningham, vice president of business relations for the nonprofit Consumer Credit Counseling Services of Greater Dallas. "Adjust your withholding, talk to your landlord or borrow from your mother--almost anything is better than one of these loans."

The pitch for a refund anticipation loan is simple: speed and convenience. But a little planning can keep the fee charged for such loans in your pocket. Remember that a refund anticipation loan is a short-term advance on your own money and one of the most expensive ways to borrow.

Here's how a refund anticipation loan works:

At the tax preparer's office, the taxpayer signs a form authorizing the IRS to deposit his refund in the lender's account. The taxpayer receives the refund up front, less a hefty service charge. The taxpayer's anticipated tax refund secures the loan. After the return has been processed, the IRS deposits the taxpayer's refund into the lender's account.

Such loans are gravy for the tax preparer. Refund anticipation loans typically include $30 to $115 in loan fees. Some tax preparers add an "administrative" or "application fee" of $25 to $60 and a few charge a special fee to file the return electronically. Given the short term of such loans, the effective annual percentage rate can hit triple digits.

There are no precise figures on the number and total cost to consumers of refund anticipation loans. But using IRS figures and bank reports, Chi Chi Wu, a staff attorney for the National Consumer Law Center in Boston, estimates that the 10 million refund anticipation loans issued in 2003 cost consumers about $1 billion, or an average of $100 each.

If you file your return electronically, you can expect a return in about three weeks, and if you sign up for direct deposit, you should have the money in ten to 14 days. So, a refund anticipation loan doesn't get the money in your hands significantly faster than waiting for reimbursement from the IRS.

Such loans make no sense unless your have no cash or credit reserve and are about to starve. So, for most people, there is no reason to sign up for a refund anticipation loan.

But after getting bitten once by such a refund anticipation loan, it's possible to get bitten again. The loan must be repaid, even if the taxpayer's refund is smaller than anticipated, denied or frozen as part of a divorce settlement. You can bet that any shortfall to the lender is hit with a hefty interest charge to the borrower--it's all right there in the small print no one reads.

If the taxpayer doesn't repay the loan, the lender may turn it over to a collection agency. That will almost certainly show up on your credit report, prepared by Equifax (nyse: EFX - news - people ), Experian or Trans Union, and damage future applications for credit and a home or auto loan at major banks such as JPMorgan Chase (nyse: JPM - news - people ), Wells Fargo (nyse: WFC - news - people ) or Citigroup (nyse: C - news - people ).

Refund anticipation loans are sold under names such as "Refunds Fast," "Fast Cash," "Express Money" or "Instant Refunds."

If you plan to spend your refund immediately and just can't wait for that new stereo, TV or refrigerator, check into store financing. Many large retailers offer low or no interest and fees for the first 30 to 90 days. As always, read the contract. (See: "Seven Things To Do With Your Tax Refund.")

In December, H&R Block (nyse: HRB - news - people ) agreed to pay $62.5 million to settle four class-action lawsuits dealing with its use of refund anticipation loans. The deal will cover 8 million customers who got the loans between 1989 and 2005.

Critics charge that the loans prey on low-income and unsophisticated taxpayers who don't fully understand the cost of the loan. H&R Block says all fees are disclosed and a chart shows less costly alternatives to a refund anticipation loan.

"If people need the money right away, they need to be aware of alternatives so they can make an informed decision," says Linda McDougall, a spokeswoman for H&R Block in Kansas City, Mo.

Some taxpayers intentionally over-withhold as a forced savings plan. It's a bad idea because you're giving your money to Uncle Sam interest free for a year. (See: "Getting The Basics Right" and "Withholding.")

For many, tax season is the time to split a dozen pencils into kindling. Tax preparation software helps and a good tax pro, while far from cheap, can save you money by taking all applicable deductions and preparing your return accurately.

It's never too early to start thinking about how you can save money on next year's taxes. (See: "Getting A Jump On Tax Season.")

But whatever you do this year, don't sign up for a refund anticipation loan.

http://www.forbes.com/finance/2006/02/10/t...3taxrefund.html

[Kajikit 65]

They seem like an incredible racket to me... paying $200 just to get your own money two weeks faster is a ripoff! Last year we paid the higher fee for a one-week turnaround (something like $50 for instant processing and a direct deposit to our bank account as opposed to $20 to get a check in the mail) and I thought even THAT wasn't 'fair'...

[w¡n9Nµ7 §£@¥€r 123]

Last year we paid the higher fee for a one-week turnaround (something like $50 for instant processing and a direct deposit to our bank account as opposed to $20 to get a check in the mail) and I thought even THAT wasn't 'fair'...

Not fair? Even though you knew what the alternatives were and were nevertheless willing to pay the higher price?

[Dixie_Peach 1]

Makes me glad I do my own taxes! whew! Used to work for H & R Block (just tax season)... I felt I was cheating people when the rapid refund was used.

[Kajikit 65]

We needed the money to pay for my AOS!

[w¡n9Nµ7 §£@¥€r 123]

We needed the money to pay for my AOS!

There's no deadline on filing for adjustment. Were you close to having over 180 days out of status?

[Kajikit 65]

We needed the money for more than one reason... and it was a LOT of money. so my husband decided the extra fee was 'worth it'. We won't be doing it again this year...

[w¡n9Nµ7 §£@¥€r 123]

so my husband decided the extra fee was 'worth it'.

That sounds fair.

[almaty 19]

i avoid it and tell my clients in the past..the sad part allot of them were single mothers and got a large EIC sum and could not wait for the $ to come via mail..

[Satisfaction 1]

Anything is good to get people to sign off on loans that will eventually them rip off. Who wants a loan with a 25% rate??? I always wondered.

Ironically, the rich gets away with even higher tax breaks now (thanks to GWB). That's the way the system works here. What a surprise...

[Hilarious Clinton 452]

Twice as bad because a refund is an interest free loan to the government in the first place.

Under-withhold and they stick YOU with a penalty. That always pissed me off.

[w¡n9Nµ7 §£@¥€r 123]

Under-withhold and they stick YOU with a penalty. That always pissed me off.

Yeah, that sucks. Any idea how much you have to underwithhold before they penalize you for it?

[Satisfaction 1]

Yes, you're right. Personnally I do my taxes myself with Turbofax.

PS: I have to find this interesting article about mortages loans too. It's the same kind of same rip off or worse.

[w¡n9Nµ7 §£@¥€r 123]

Yes, you're right. Personnally I do my taxes myself with Turbofax.

Turbofax, eh?

[pax 0]

I have a part-time job at a clothing store in addition to my regular, full-time job, and their payroll office (and there's only one...on the other side of the country) won't deduct federal taxes from my paycheck because I never "make enough." Even though most of my paychecks from there have been over $100.

Because of their stupidity and inflexibility (and apparent inability to return a phone call), I owe over $300 this year. Yay.