I don’t know about you, but tax season is definitely not my favorite time of the year!
W-2 Forms, 1099s, bank statements, mortgage interest documents, childcare records, health care receipts – the paper trail goes on and on…and on. It’s no wonder, so many of us dread it and postpone filing until the April 15 deadline.
The only pleasant thing about tax season is the prospect of a refund on your income taxes.
These tax refunds can be a lifesaver for many of us. The only problem is – depending on how you file your taxes – it can take 2 to 10 weeks before you see your refund.
In the meantime, you have all these expenses you don’t want to add to a credit card. The thought of getting a substantial refund starts to make you think about all of the different ways you want or need to spend it. Suddenly, it seems like everywhere you look you are seeing the words “Fast Cash” and “Rapid Refund” and wondering if that’s something that could benefit you.
These Rapid Refunds or Return Anticipation Loans (RAL) have been big business for several years now. They became popular because they give taxpayers a way to get their federal and state tax refund money almost immediately.
Many companies and businesses, from local furniture stores to Wells Fargo, and even used car lots have thrown their hat into the ring to benefit from this opportunity. And, according to the National Consumer Law Center, nearly eight million Americans a year buy into these advance cash loans to get a jump on their IRS tax refunds.
But let me tell you, any time you see the words “Fast Cash” or “Money Now,” know that it comes at a price. These Advance Cash Loans (or Return Anticipation Loans or Tax Refund Loans) are big business because they come with a hidden agenda and cost you big money.
What is a Refund Anticipation Loan (RAL)?
A Refund Anticipation Loan is a short-term loan generally offered by tax preparation services like H & R Block, Liberty Tax (you know, the ones trying to flag you down on the street corner dressed up like Uncle Sam and Lady Liberty), Jackson-Hewitt, and many others – some reputable, some not so much.
Companies offering Refund Anticipation Loans claim to give you the full refund due without the full wait. These anticipation loans are usually accessible as early as December, adding to their widespread appeal. Plus, these RALs may be approved in just minutes – regardless of your credit – and can be made for either the full or partial amount of your expected return.
By taking out one of these loans against your tax refund, you can have your money in hand as soon as the Internal Revenue Service accepts your return. The money will be issued in the form of a check, direct deposit, or a special debit card.
However, a cash advance loan is just that: a loan. It is not your actual tax return. And there’s the problem. If the lure of these rapid refund loans is getting your attention, there are some essential facts you need to know.
The Hidden Dangers of RALs
Simply put, tax advance loans are big business – they are not a consumer-friendly product. While each RAL lender has a different way of doing business, all of them present these advance loans with simple, appealing words like “FREE ADVANCE” or “NO CREDIT CHECK” or “ZERO PERCENT APR.” Don’t believe the deceptive language.
These refund anticipation loans often have:
- Extremely high-interest rates
- Electronic filing fees
- Check cashing fees
In addition to these costs, you are required to have your taxes prepared with the service offering the loan. This fee can be as little as $50 or as much as several hundred, all of which will be deducted from your return.
This is in contrast to doing them yourself or using IRS Free File. Free file is an IRS service which allows anyone with an adjusted income of $66,000 or less to use its tax software to prepare and file returns for free.
Also, since these rapid return loans are really short-term financing, they are not subject to the same government regulations as conventional loans. RALs can have interest rates that shoot as high as 36%, meaning you could owe significant interest on money you just borrowed for a few weeks.
Other hidden charges like electronic filing fees and fees to “cash the loan check” will add on even more costs. Fees for a refund loan application can range from $25 to $75 for a federal return.
These loans are secured by using your anticipated tax refund as collateral, and if your tax refund turns out to be less than you expected, you have now borrowed more than you can afford to repay.
How Tax Refund Anticipation Loans Are Repaid
Once the tax service prepares your taxes and the IRS approves your return, your preparer will open an Electronic Refund Deposit (ERD) account and inform the IRS to deposit your refunds there legally. The sole purpose for this ERD account is for repaying your RAL provider.
So later, when your actual tax return is sent, the check automatically goes directly to the lender.
The Bottom Line
If you take the time to do the math, it’s evident that Refund Anticipation Loans are nothing more than predatory financing that costs you, and benefits the lender. They prey on low-income families who struggle for access to fair credit.
According to The Balance, “consumers spent almost 750 million dollars in fees on these types of loans. An incredible amount for only 8 million loans being processed. It is an average of $950 in fees per person”. $950 in fees for a short-term loan of just a few thousand. Wow!
Also, the IRS is no longer providing consumer information to these Refund
Anticipation Loan services because it infringes on the privacy rights of taxpayers. This includes information about tax liens that is critical to their ability to offer these loans.
Consider filing your taxes electronically and early. The IRS usually begins processing tax returns and sending out refunds in February. If you do the preparation and filing yourself before March and have your refund directly deposited into your bank account, you could see your return in only ten days to three weeks, with no costs, no interest, and no hidden fees.
Better still, consider making a change to get little or no money back at all. If you are getting a substantial tax refund, it means you are giving the government your money for the better part of the year. They earn interest on it, then give the principal back to you.
That’s money you could be using along the way to get out of debt and build your savings. So, take a look at your W-4 and see how you can make your tax refund work for you more efficiently.