Refund anticipation loans still troublesome for taxpayers

An annual report issued today by the Consumer Federation of America and the National Consumer Law Center once again underlines the insidiousness of refund anticipation Loans, or RALs: short-term, high-interest loans marketed by tax preparers and lenders and often pitched as a way to get your refund immediately.

Trouble is, refund anticipation loans can carry an effective annual interest rate of from 50% to 500%. When application fees are included in the calculation, the interest cost can range from 80% to nearly 1,200%. On a positive note, fewer people took the loans in 2006, the most current year for data, the report says.

Separately, the New York State Division of Human Rights filed civil suits yesterday against tax-prep companies Jackson-Hewitt and Liberty Tax Service for what it called "predatory lending practices targeted to communities of color and military families." The suits allege that the two companies disproportionately target and sell the "abusive" RALs to these populations.

In The New York Times today, officials from both companies denied the allegations.

Taxpayers who opt for these loans may not realize that if they could wait just 10 days, many would get their refunds directly from the IRS, without any interest or high processing fees. The agency says that's how long it typically takes for electronically filed returns with the direct-deposit option. (Without direct-deposit, it's another week, on average.) And any tax return showing an adjusted gross income of $54,000 or less can be prepared and filed online for free.

But I wonder whether more taxpayers than usual will use RALs this year out of concern that their refunds will be late. The IRS says early filers who use certain forms cannot even file until Feb. 11 this year, to accommodate computer system updates. Once returns are filed, they're subject to normal processing speed, the IRS asserts. But people who are vulnerable and in need of cash may be easily convinced that an RAL is a surer thing.

Today's report acknowledges that some people may not be able to wait. For those folks, it notes that H&R Block and JP Morgan Chase have lowered their RAL fees relative to other lenders.

"Taxpayers should avoid RALs in the first place; but if they insist on getting one, they should shop around," the report says.

--Tobie Stanger

 

Comments

[AndreaP]

We all know that tax refund loan or refund anticipation loan(RAL) are getting more populay nowadays. These are loans made by your tax prepares against tax refund. If this personal loans are planned very well then this may result in good terms. But if your refund gets rejected by the IRS, then you have to pay it all back, plus staggering interest. And you will be needing your personal bank account if you want a direct deposited. However, the high interest rates draws a lot of criticism of tax refund loans, and the IRS is firmly committed to not getting involved.