When you need a little bit of extra cash, there are few options as fast, convenient and discreet as payday loans. Yet during tax time, the eyes of some consumers may be captured by the tax refund loan ads of big-box tax preparation services like H & R Block and others. However, tax refund loans do consumers an expensive disservice. This is the focus of a recent article by personal finance author Thursday Bram. She writes for the finance blog Investopedia that tax refund loans are products that should be handled with extreme caution – if they must be handled at all.

Payday loans are cheaper and much more flexible. Why waste money? Pay a flat fee of $15 to $30 per $100 loaned and be done with it. They are not difficult to pay on time, and numerous studies show that as high as 90 percent of customers do pay off their cash advance on time.

Tax refund loan numbers not in your favor

Bram shows that according to National Consumer Law Center research, 12 million taxpayers took tax refund loans in 2004, which is a staggering figure. Imagine how much money they could have saved if they’d explored their options more fully. Sure, it seems easy. The tax preparer offers an advance payout that’s available immediately. How convenient; no need to wait for the IRS to get around to your return and either mail or wire the funds. Once fees for the service are factored in, however, the tax preparer takes a large part of the person’s tax refund.

Bram suggests some alternatives, such as adjusting your W-4 with your employer to reduce withholdings. Cash Advance Mojo suggests something along the lines of an online payday loan if waiting for adjustments isn’t an option.

Of course tax refund loans are a good deal for the preparers. Otherwise, they would not be pushing them to the public this time of year. For one thing, since the loan cannot be more than what the consumer would receive in their refund, the odds that the tax refund loan will be repaid on time is extremely high. If the preparer files all paperwork properly (which big-box tax preparation companies tend to guarantee), how can they lose?

The IRS has tried to crack back tax refund loans

Have I got a tax refund loan to sell you...

They have tried, but nothing has stuck. But the law hasn’t ignored tax refund loans by any means. In 2002, H&R Block settled with the New York City Department of Consumer Affairs over these predatory loans. In 2006, the company went to court again, this time with the State of California.

Bram brings up another troubling ethical issue with these loans: tax preparers can “inflate expected tax returns to improve their profits. While this procedure is unethical, the gamble can sometimes be worthwhile. These tax preparers essentially bet that the IRS will not catch the changes made to their clients’ tax returns and charge higher fees to make a profit.”

Tax refund loans – steal from you, lie to the IRS

Something new is coming. Bram writes that the IRS will roll out the Customer Account Data Engine (CADE) by 2012. Among other things, this can process a consumer’s return within 24 hours and issue refunds within three days. This should effectively eliminate the need for tax refund loans. Thus, if a consumer is in a tough place financially around tax time, they won’t have to wait for any refund money. However, at other times of the year, the need for emergency cash beyond what the budget covers can be met with payday loans.

If you need assistance with tax trouble click tax resolution/settlement.

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But let’s think about it. Since it’s time to file your income taxes, you may be thinking about the size of the refund you are entitled to. If you experience a financial setback at this time, it’s only natural to be interested in the possibility of receiving your tax refund money early, right?

Be careful – tax refund loans aren’t as good as they seem

Tax refund loans, also called instant refund loans or refund anticipation loans, seem like a great thing if you need cash right now. But the costs are steep. Origination fees range from $29.95 to $89.95, and electronic filing fees of $40 are also common. All you typically need to apply is a year-end pay stub, proof of employment and identification. Sure, you can receive all or a portion of your tax refund (up to about $5,000) within a couple of days, but why would you want to when payday loans are available without origination or “filing” fees?

According to About.com, “the fees for the average refund of just under $2,000 extrapolate to an annual percentage rate of 222.5 percent. Yet 12 million taxpayers paid over $900 million dollars in fees last year just to get their refunds a little faster.”

People think they need tax refund loans

Have they heard of no fax payday loans? They a much more attractive option. Yet the new trend persists.

In Atlanta Journal-Constitution coverage of this outrageous phenomenon, we see that people are indeed using tax refund loans to cover cash emergencies. Graphic artist Pat Cameron had medical bills to cover, so he went to Jackson Hewitt for a tax refund loan.

“I know they charge so much, but this will get me through the first of the month,” he said.

The IRS doesn’t endorse such programs, but neither do they openly speak out against them. They encourage taxpayers to use free electronic filing services, which directly deposit any refund monies due into a consumer’s checking or savings account in about 10 business days. For those who can show hardship, there are even special programs available. But if even that is not fast enough, faxless payday loans are a much better option than tax refund loans.

Recession drives people to desperate ends

That’s exactly the category tax refund loans fall under: desperation.

Overdue bills, foreclosures, rent and many other ominous signs are threatening the financial well-being of consumers. Numerous big-box tax preparation companies like H & R Block, Jackson Hewitt and others are swooping in with these high fee, high interest loans.

Suzanne Boas, president of the Consumer Credit Counseling Service of Greater Atlanta, is quoted on the matter in the Journal-Constitution

Generally, we don’t think it’s a good idea to pay such an exorbitant rate to get what would be due to you anyway in a couple of weeks.

Consumers, payday loans are a better option!

If you are due a tax refund, you will receive it in a couple of weeks if you are using free electronic filing with direct deposit. Don’t go the route of tax refund loans unless paying exorbitant fees upon fees, plus high interest are OK with you. Logically, it’s not the best choice. If you need quick cash for an emergency and can’t wait until you have your tax refund safely in your bank account, try payday loans. They’re cheaper, fast and quite discreet.

If you need assistance with tax trouble click tax resolution/settlement.