Tax season can be a reassuring time of the year for many families. They count on their tax refund to pay bills, perhaps plan a much needed vacation, or do some much needed home or auto repairs they’ve been putting off. Whatever you’re looking to do, your return has you covered.
But this year, it’s a little different. From our previous article: ‘If You’re Looking for Your Tax Refund as Soon as Possible You Might be in for a Disturbing Awakening’, we talked about the IRS holding tax refunds for those claiming the Child Tax Credit or Earned Income Credit until February 15th. Some might be patient while others might need that money now. For those looking for a way around will conceivably dabble with something called “Refund Anticipation Loans”. They might look like a great option but, beneath the surface, they are expensive and darn right evil. Here’s why…
What Exactly is a Refund Anticipation Loan?
As you know, when your regular tax preparer completes your return and informs you’re getting a refund from the government the money, that money isn’t handed to you on the spot. You wait 21 business days (typically) for a check to be cut or for it to be deposited into your checking account and when it’s all said and done, the federal government is sending you the money. No strings attached.
A refund anticipation loan allows the taxpayer to apply for a loan with a third party against a taxpayer’s expected refund. The third party banking institution works with the tax preparing company to offer this service and fund customers.
After the return has been prepared and filed, the loan application is sent to the third party, goes through an approval process, and a loan decision is made. If approved, you’re fronted either a portion or your refund in its entirety and funds will be available to you in amount a day.
For those interesting in money now this is quite a lucrative offer with little to no risk, right? After all, wouldn’t you love to file your taxes and get your refund all in the same day or next? But once the IRS actually releases your refund the amount loaned is deducted and is also reduced by fees and interest that may apply. And this is where the real danger sets in.
How Much Do they Cost?
A refund anticipation loan is not your everyday bank loan carrying a respectable interest rate with minimal to no fees; you’ll wind up paying absurd fees and interest for not waiting! These loans are advertised to low income families and/or people with cash flow issues which makes them very predatorily. So folks with money issues or lacking the knowledge of cheap versus expensive borrowing will fall into their trap.
To put it delicately, you’d be better off burning a small amount of your money than paying the fees and interest associated with these loans. The fees and interest can add up to more than $250 and shrink your refund by as much as 10%, with APRs well over 30%. The Consumer Federation of American states, “The effective APR for refund anticipation loans are based on a 10-day loan period ranges from about 50% (for a loan of $10,000) to nearly 500% (for a loan of $300). The APR for a typical RAL of about $3,000 can be from 77% to 140%”.
What if You Couldn’t Pay Your Refund Back in Time?
Nothing is ever guaranteed and your tax refund isn’t any different. Suppose there’s a miscalculation in a deduction, an issue your child support payment, or a tax lien, do you think your tax refund will be released to you in time to pay back the loan? Worse, if you can’t repay the loan, the lender may assign the debt to a collection agency. The unpaid debt will appear on your credit report. And, if you apply for an RAL again next year, the lender may take that refund to pay this year’s unpaid refund anticipation loan debt, even if you use a different lender or tax preparer.
So, not only could you be without your return for this year, you’ll have a debt in collections, see a drastic reduction in your credit score, and your future tax refund in jeopardy which could have all been avoided if you waited a few more weeks to have the government issue your refund.