The welcome demise of the tax loan

The storefront tax-preparation industry, dominated by chains H&R Block, Jackson Hewitt and Liberty Tax Sevice, has a good grasp of what its middle- and low-income clients want. It's what we all want: Speed and ease of filing. A big, fat refund. Fast reimbursement.

The industry's solution to the latter is the refund anticipation loan, or RAL. The tax-prep service loans the client an amount equal to the expected refund, and sets up a dummy bank account to receive the refund. When the money arrives electronically--usually within 48 hours of filing--the client pays back the loan from the dummy account, which is then closed. The fee to set up a dummy account is around $30.

Sounds reasonable, until you calculate the actual costs. For example, on a refund of $2,500--close to the average--a Jackson Hewitt client would pay the $29.95 service fee plus 2.5 percent interest on the total refund. Assuming the loan is paid back within 11 days--typical, according to the IRS--the effective annual percentage rate (APR) is 123 percent! The not-for-profit National Consumer Law Center (NCLC) which has been monitoring RAls for several years, points out that the APR for smaller refunds can be more than 500 percent, since that $29.95 fee represents a greater percentage of the refund.

It's ridiculous to ask anyone to pay that much, especially the population that frequents storefront tax establishments.

Recently, however, the center reported that RAL loans are losing their allure. Apparently, consumers are wising up. For instance, they're trying new, inexpensive or free services like the IRS's Free File, which can generate a refund from an electronically-filed return within 8 and 15 days. This year, Free File banned advertising for RALs among its participating tax-prep companies, which no doubt reduced the public's appetite for these products.

That's all to the good. Sure, it's exciting to get that cash right away, and in some cases, it's imperative. But my guess is that most folks can wait one more week for their money. And for a little bit of patience, they gain a lot.