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Why Pay to Borrow Your Own Money Through Refunds Anticipation Loans?

2/25/2008

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Tax season is here and many Americans are looking forward to getting a large refund. Some taxpayers grow impatient when it comes to waiting for Uncle Sam to sign the check and many tax preparers offer instant refunds or Refund Anticipation Loans (RAL) – essentially an advance for the amount of your refund. While RALs might be a good source of instant cash, BBB warns that they come at a high cost.

RALs are short-term loans over the time it takes for the tax preparer to receive the refund check from the IRS – usually two to three weeks. The National Consumer Law Center (NCLC) found that the effective annualized rate for a RAL can range from about 50 percent to nearly 500 percent. The interest rate is extremely high despite the low risk to the lender, and some companies further gouge consumers by tacking on additional administrative fees. According to the NCLC, consumers took out more than nine million RALs in 2006 and paid more than $900 million in loan fees and $90 million in additional fees.

“For taxpayers who want to get their hands on their tax refund money right away, they need to keep in mind that an instant refund can come back to cost them more than it helps them,” said Steve Cox, BBB spokesperson. “RALs are based on anticipated tax refunds and if consumers end up getting less money back than predicted they will owe the money loaned and will incur hefty fees and fines if they don’t pay off the RAL on time.”

Instant refunds have come under scrutiny lately. In January 2008, the IRS issued a request for comments as to whether or not they should create regulations and restrictions governing RALs – particularly given the bad effect the practice has had on low-income households.

BBB is advising consumers to consider that even some tax preparation companies that offer RALs don’t recommend them to their customers. In a written statement to an MSNBC.com columnist in February, an HR Block representative said, “We believe the best option for our clients is to file electronically with the IRS and to receive an IRS direct deposit rather than taking out a RAL.”

Before any taxpayer agrees to an instant refund, BBB offers the following options and advice:

Why not e-File and Direct Deposit?
The fastest and most secure way for consumers to get their refund is to file their taxes online and then allow a direct deposit of the refund into their bank account. Taxpayers can have the money in as little as 8 to 15 days. Some tax preparation companies will even help taxpayers set up bank accounts to route the refund if accounts are not already established, although BBB generally advises consumers to work directly with financial institutions to protect their account information. 

Don’t fall for the “convenient” debit card.
Some tax preparers offer to provide instant refunds on “convenient” debit cards. However, these cards are often another way for the company to make money. The debit cards include hidden fees, as high as $20 per transaction, and can have limits on how much money consumers can access, which means users have to pay the high transaction fees over and over again.

Finance purchases other ways.
If consumers are looking to purchase specific high-priced items with their refunds, BBB encourages them to look into financing options other than RALs, such as through store credit promotions and offers, which may offer better rates.

If you must, then shop around.
If it is absolutely necessary that a consumer receive their refund immediately, BBB wants people to know that it pays to shop around and look for a good deal. Fees and rates for RALs vary by tax preparer. And consumers can check out a tax preparer’s record of integrity and performance free-of-charge with BBB Reliability Reports, available online at www.bbb.org.

For more advice on tax season issues and personal finance, and to take the new BBB Money Manager Quiz, go to www.bbb.org.

 

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