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News
Rapid
Tax
Refund Loans Come with a High Cost
Posted 4 January
2010
It’s that time of
year where tax preparers may invite you to get a “Refund Anticipation
Loan” or “RAL” – a loan borrowed against the expected tax refund.
“Although the loan may come a few days faster than a refund, you end up
paying extremely high fees to borrow your own money,” according to Erin
Ludwig, Iowa State University Extension Family Resource Management
Specialist.
A “Refund Anticipation Loan” is a very short-term loan, secured by your
expected tax refund, arranged by a tax preparer through a bank.
You pay finance charges and, most often, you pay tax-preparation
charges as well. The loan is repaid when the IRS sends your full
refund to the lending bank.
Refund anticipation loans are expensive. A RAL gets your refund
to you in 1-4 days, compared to just 7-10 days if by ordinary
electronic refund deposit to your bank. According to the National
Consumer Law Center, a typical loan would be around $3000 or
more. For RALs in 2009, a consumer can expect to pay from $62 to
$110 for RAL fee. The effective annual percentage rate would be
around 77% to 140%. That’s a bad bargain for an “advance” of just
7 to 10 days.
Tax preparation fees are almost always deducted from RAL proceeds,
making taxpayers less sensitive to their costs. “Consumers should be
asking questions when taking out a refund anticipation loan,” according
to Ludwig. “How much will I pay for the loan? What does the fee
really buy me? What are all the fees that I will be expected to
pay?” These are a couple of good questions that consumers should
be asking since some tax preparers will have low tax preparation
charges to get the customer in the door, then charge more add-on fees
to make up for the lower charge.
Families with low to moderate earned income can save by having their
taxes prepared by certified, volunteer tax preparers.
Taxpayers who choose to have their taxes done by certified AARP or VITA
volunteers can save (on average) about $180 in preparation fees.
Since volunteer preparers electronically file returns, refunds can
usually be directly deposited in a bank account within two weeks,
saving the taxpayer from paying a RAL fee.
To locate the nearest VITA site, call 1-800-829-1040 or to locate the
nearest AARP Tax-Aide site, call 1-888-227-7669. For more
information, contact your local Iowa State University Extension Family
Resource Management Specialist- , Erin Ludwig (563-380-1475 or eludwig@iastate.edu).
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