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Northern Indiana
BBB asks: Why pay to borrow your own money
December 15, 2009

 Due to our nation’s current economic condition, many Americans may be more dependent on next year’s federal tax refund because of the recession. Many are eager to get their refund to help pay off debts, ease strains of pay cuts or job loss. However, many erroneously associate long waits with refund reimbursement causing people to utilize Refund Anticipation Loans made available by tax preparers. RALs are short-term advancements for potential tax refunds. While RALs maybe a good source of instant cash, BBB wants consumers to understand the true costs associated with the use of these loans. RALs often have exorbitant interest rates, and are sometimes offered by fly-by-night tax preparers. BBB suggests consumers do their best homework this tax season.

 

RALs are similar to payday loans with interest rates averaging between 50 and 500 percent. These short-term loans are available to those expecting a tax refund, however, there are several dangers associated with their use. In addition to high interest rates, RALs can have hidden administrative fees and require consumers to pay difference if mistake in anticipated amount is made.

         

When considering a RAL, BBB encourages consumers to research a tax preparation business performance and BBB Accreditation status or to get a list of BBB accredited accountants, free of charge, at www.bbb.org.

 

Knowing a business’ history is important because many take advantage of uninformed consumers with additional hidden fees. According to a survey conducted by the National Consumer Law Center, “RALs drained the refunds of about 8.7 million American taxpayers in 2007, the last year on which the Internal Revenue Service provided data. This represents about $833 million in loan fees, plus over $68 million in other fees.”

 

In addition, consumers should understand that if the loan amount is higher than monies received from their refund, they are required to pay the company the difference. “RALs are based on anticipated tax refunds,” said Michael Coil, President/CEO of BBB of Northern Indiana. “If consumers end up getting less money back than predicted, they still have to repay the loan and may incur hefty fees and fines if they don’t pay off the RAL on time.  BBB is encouraging consumers to be aware of RALs so they don't get in over their heads.”

 

Consumers should also be aware of unethical, costly practices such as the “convenient” debit card, which can include hidden fees like charging $20 for every transaction made.

 

BBB recommends consumers research businesses offering RALs as well as different costs or interest rates associated with the loans they’re offering. According to the IRS, who encourages the use of e-filing, “90 million people used e-file in 2008. E-file supports this growing trend toward electronic tax filing and payment with benefits like: faster refunds, greater accuracy, secure and confidential submission, no paper return to mail, file now, pay later, quick confirmation.” Methods such as these are just as timely as a RAL and don’t cost the consumer to borrow money that is actually theirs in the first place.

 

For additional information and advice you can trust this tax season, start with bbb.org.

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