Tax refund loans: wrong product, wrong time
We could all use a little bit more money these days. The fact that America is in an economic depression has done nothing but accelerate this need. With tax time upon us, many people are dreaming about what they’ll do with their tax refund, if they’re owed one. Unfortunately, some want their refund even faster than direct deposit can deliver. They go after expensive tax refund loans.
David Ellison of the Houston Chronicle reports that these tax refund loans, also known as refund anticipation loans (RAL), are too much to pay. Since electronic filing with the IRS and direct deposit can have the money in your bank account within 8-15 days, why do people find it necessary to resort to RALs?
Not because RALs are cheap, that’s for sure
Depending upon who does your taxes, taking out an RAL could cost you anywhere from 50 to 500 in APR. According to Ellison, since the bulk of people who take RALs are of low- to moderate-income, the steep fees become even more problematic.
“We like to see either that they are banned or the fees reduced,” said Chi Chi Wu, staff attorney with the National Consumer Law Center. “Really, banning them will probably be safer.”
Banning RALs is seen as a tall order, particularly since the IRS doesn’t seem to want to get involved. They say it is “a financial arrangement between a taxpayer, the tax preparer and the financial institution.” A 36 percent APR cap is a more viable option proposed by many.
There is a better option
Tax preparers like Jackson Hewitt and H&R Block say they make customers aware of all of their options. Their defense of RALs is that “millions” of people do not have personal bank accounts, so they opt for the money upfront since they’d have to wait weeks for it to come in the mail otherwise.
However, some are honest about the product. Nancy Mays, an H&R Block spokeswoman, said that a tax refund loan isn’t the best option for customers. The 20 percent (of “millions”… do I smell number fudging?) of H&R Block customers who use RALs do so because they have an immediate bill that needs to be paid. But here’s a news flash. There is a cheaper option for short-term personal loans. Consumers shouldn’t jump at the first offer out there… there are better options.
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If the people in lower to middle income brackets didn’t have the larger proportion of financial burden relative to income – like trying afford decent health insurance along with housing, transportation, etc – I doubt they would need things like refund anticipation loans. Let me propose an Idea: that if everyone in the United States who made less than $20,000 a year had to pay no taxes other than sales, I think you’d see the problems of poverty a lot closer to disappearing than by nannying them to death.