This time of year I am sure many of you have heard or seen information concerning the availability of “refund anticipation loans”. One national tax preparation chain has people standing outside in the cold dressed like the Statute of Liberty holding signs advertising these loans.
Should you apply of one? The short answer is no.
The current Internal Revenue Code authorizes Refund Anticipation Loans. It is simply a loan secured by your expected tax refund. The tax preparation service gets your refund and you get the pleasure of having your money a few days earlier and paying dearly for the privilege.
Any tax preparation service that offers these loans must make Truth in Lending disclosures concerning the annual percentage rate of the loan. They must also disclose the total cost of the loan and the estimated number of days within which the loan will be repaid. (Internal Revenue Code Sec. 42-480.)
The interest rate authorized by the IRS Code on these loans is staggering. You may be charged up to a 60% per year on the money for the initial twenty-one days of the loan and you may be charged up to 21% per year from the twenty- second day until the date of repayment. Awfully expensive money. Consumer advocates have suggested that these loans may carry annual percentage rates of between 50% and 500%, or higher. An excellent video on the high cost of this type of loan prepared by our friends at Cambridge Credit Counseling Agency can be viewed HERE.
Remember an important fact: You are borrowing your own money. A tax refund is simply money that you overpaid on your tax bill that the federal government was able to use interest free for a year. By adjusting your withholding you could have had that extra money in your pay check each pay period and earned interest by putting it in a saving account or interest bearing checking account. Now that you loaned your money to the government interest free, these loans provide for steep interest payments to be made to the tax preparation company before the government returns your money. If you do not get your refund or you do not get as much as you expected, you are still responsible for the full amount of the loan.
Government regulators are targeting these types of loans. This year H&R Block has been prohibited from obtaining the money they needed to offer the loans and there is every indication regulators will make it harder for tax preparers to offer these loans in the future. This is one area in which more consumer protection is needed. This loan product and its evil twin, the payday loan should finally meet their permanent demise.