In a hurry to get your refund? Beware

Herb Weisbaum • Profile • E-mail

When you file your tax return and you have a refund coming, it is only natural to be in a rush to get that money.

Tax preparers big and small are happy to help. They promise to speed up the refund process and have cash in your hands in just a couple of days. To do this, you take out what is called a refund anticipation loan.

Using the most recent IRS data, the Consumer Federation of America and the National Consumer Law Center estimate that approximately 9 million taxpayers – that’s about 1 in 14 - used a RAL during the 2006 tax filing season. The nationwide cost for these quickie loans was nearly a billion dollars, according to estimates.

With the sluggish economy, consumer advocates fear more people will be tempted to use a RAL this year. “Just say no,” urges Jean Ann Fox, director of financial services at the Consumer Federation of America, “because they are extremely expensive.”

Some of the big players in the market, such as H&R Block and JPMorgan Chase, have significantly reduced the cost of their RALs, which is helping drive down the price industry-wide. Even so, that short-term loan still has a staggering interest rate.

The Consumer Federation of America says the effective annual percentage rate for most RALs ranges from 50 percent to nearly 500 percent. Include the application fees in that calculation – anywhere from $60 to about $135 – and those APRs are from 80 percent to nearly 1,200 percent!

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“We’d be outraged if our credit cards cost more than 18 percent interest,” Fox says. “So why would you pay over 80 percent to borrow money for less than two weeks?”

A refund anticipation loan is a real loan. It is not a faster refund from the IRS. You are borrowing money from a bank until your refund arrives to repay that loan – and that involves some risk.

If some of your deductions are disallowed, or the IRS does not approve some of the tax credits you were expecting, your refund won’t be big enough to repay the loan. If you can’t come up with the extra money, that interest clock will continue ticking.

Most of the big tax preparation services make it clear that a RAL is a loan. But Chi Chi Wu, staff attorney with the National Consumer Law Center, says some independent preparers don’t do that. They call it a “fast refund” or a “speedy refund” which, she says, “can be misleading.”

This victim learned her lesson
For years, Chicago resident Rhonda Jones used refund anticipation loans to get her refund and earned income-tax credit. When you are working three jobs to make ends meet, you want to get that money as quickly as possible.

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