H&R Block won't be offering any short term loans against tax refund checks this year. Image: MoneyBlogNewz/Flickr.com/CC-BY

This year, H&R Block will not be offering any short term loans against tax refunds. Refund Anticipation Loans, or RALs, are loans lent by a preparer against a potential refund, less a fee. The banking partner of the company was forced out of offering the loans by regulatory bodies.

No more short term loans from H&R Block

The nation’s largest tax preparation service, H&R Block, previously offered a credit product to customers called a Refund Anticipation Loan. The loans, RALs for short, are offered by many tax preparation services. It’s a short term loan against an anticipated tax refund, with a fee subtracted from the refund total. The preparer cuts a check or dispenses instant cash, and the refund check is turned over to the preparation service. In other words, if a person should hypothetically get an $800 tax refund, but needs money now, he or she can get an RAL for $725 against the $800 return. The return check goes to the preparer, if the return is accepted. Recent regulatory action has forced H&R Block to stop offering the loans.

HSBC forced out of bankrolling the loans

According to USA Today, the former partner of H&R Block in funding the cash advances against tax refund checks was HSBC. HSBC was ordered not to proceed with funding any of this type of quick loan to customers by the Office of the Comptroller of the Currency, part of the Department  of the Treasury. This forces HSBC to withdraw from its agreement with H&R Block. H&R Block tried to sue to keep HSBC in the agreement, but was not successful. H&R insists it will have alternatives, but there is likely to be some loss in business as customers from Kansas City to Chicago to San Diego will have to seek RALs from other preparers.

IRS cautions against using RALs

The Internal Revenue Service has long cautioned people not to take RALs against tax refunds. The IRS recommends that people use e-filing, as e-filing through the IRS or affiliated E-file programs is free for some taxpayers, and refund checks can be direct deposited in a couple weeks.

Source

USA Today

E-file that 1040, and with direct deposit you may not need a Refund loan. Image from Wikimedia Commons.

The Internal Revenue Service has announced that it will no longer provide certain information to tax preparers issuing refund anticipation loans. More than once has the product been decried. Opponents have contended that they can be worse than payday loans. An RAL, or Refund Anticipation Loan, is a loan product that depends on the tax return of a borrower. A portion of the total is deducted, and the filer is given a check that day. The only hitch is that this short term loan is not that simple should the return not get accepted.

Even the IRS thinks refund loans are bad

Internal Revenue Service Commissioner Doug Schulman announced in a press release on Aug. 5 that the IRS would no longer provide a “debt indicator” figure to tax preparers for the purposes of administering a refund anticipation loan. He also stated that it no longer seemed prudent to do so. The Internal Revenue Service allows people with adjusted gross incomes (AGI) less than $57,000 to e-file for free and have their returns wired via direct deposit within 10 days.

Electronic filing has become the rule

More than 70 percent of all tax returns are filed electronically. According to Bloomberg, H&R Block reports its average RAL loan to be about $3,000, and the average fees are $62. The term is just less than two weeks, which is about the average term of a payday loan or small personal loan. An RAL with the preparation fee and interest carries a fee of $187 on average. H&R Block, one of the largest tax preparation services in America, lent more than 2 million of these loans last year. The change in policy will affect the 2011 tax season.

Expensive way to get some cash

Refund anticipation loans carry more risk than your average cash advance. If a tax return is accepted, the transaction is closed and a person has just accepted a little less than they would get for instant cash. If a return is not accepted, the principle plus fees and penalties must be paid, which is a hard dollar for people that are already hard up. The usual RAL borrower, according to the Washington Post, has an AGI of $35,000 or less.

Further Reading

Statement from the IRS

Bloomberg

Washington Post

If you’ve ever used a tax preparation service and been owed a refund, chances are you’ve also been offered a refund anticipation loan (RAL). More than 12 million Americans receive a tax refund every year, and many of them succumb to the temptation to take out an RAL. If you want your money within just a couple of days, you can pay around $75-150 for an RAL, or for an extra $25-55 you can even get your refund on the same day. That’s on top of the fees you pay for your taxes to be prepared (typically from $100 to $300) and filed (typically from $40 to $75).

Back when you had to mail in tax forms and wait for months before receiving your refund check, tax refund loans made a lot of sense. But now you can file electronically and, in most cases, get your refund wired to your bank account within a week or two. So unless you’re really flat broke, you can probably hold out until the money arrives. Yet Americans spend $900 million a year on loan fees for tax return advances. To make sure you can avoid paying these fees and still get fast access to your refund money, here are some steps you can take:

Change your tax withholding status

If you don’t pay too much tax in the first place, you won’t have to wait for a refund. Anyone who is paying more tax than they should be can ask for a withholding adjustment. Let’s be clear here: a tax refund is not a gift or windfall. It’s your money – money that you worked hard for and then loaned the government without even charging interest. Wouldn’t it be better if you and your family could have access to that money throughout the year, and not just at refund time? Especially now that times are tough for many of us, surely you could use it to make life a bit easier, or put it in your retirement account.  Be careful not to overdo it, however, when you change your exemption status, or you could end up owing money at tax time.

Save your “overpayment” money each month

Some people figure that by intentionally paying too much tax, they’re putting that money out of reach so they won’t be tempted to spend it. If this sounds like your game plan, find a savings account with withdrawal restrictions that will stop you from using the cash for frivolous purchases. Perhaps your employer can deposit the appropriate sum in that account on each payday so that you won’t miss the money. You’ll even receive some interest on your balance now!

File your taxes electronically

More and more taxpayers are discovering how convenient it is to file online rather than mailing in paper documents. If you’re owed a refund, you’ll find out quickly, and the funds will be in your bank account within a week or two. With just a little patience, you’ll have your refund without taking out an RAL.

Open a bank account if you don’t already have one

Lots of people don’t have bank accounts, so they miss out on the opportunity to have their tax refunds deposited directly. That’s one of the major reasons so many people get RALs. If you’re one of the “unbanked”, you can save a lot of money by opening a bank account, even if it’s just for a few weeks while you’re waiting for your refund.

Be patient, plan ahead, and you won’t need to spend so much time or any money at all to get your tax refund. You’ll be able to take charge of the money — let’s not forget – that is your own, and use it however you want.  You might even decide to put it to work earning some interest for you.

The truth about Tax Refund Loans

The truth is, tax refund loans or refund anticipation loans (RAL) are very expensive. Just like payday loans and cash advances, tax refund loans must be handled with absolute care. In fact, several politicians have tried to cut down on RALs over the past years, citing interest rates on these types of loans exceeding 500% in many cases. What then can a person in need of immediate financing do to obtain money fast?

Consider Payday Loans

If you really need money now, consider payday loans or  installment loans. The difference between a tax refund loan and a payday loan is that one is easier to work with than the other. Payday loans are not only cheaper, but they are much more flexible to work with. You pay a flat one-time fee of $15, $20 or $30 (depending on the lender and/or loan amount) and you will have the money to relieve some of your immediate cash needs in no time. You get just the right amount of money to hold you over – no stress, no pressure, no additional money loss.

On the other hand, if you choose to obtain a refund anticipation loan, your “anticipation” could certainly backfire on your finances. You lose more money in the end –- money that could actually be going towards your savings fund and other important living expenses.

Save, save, save!

Saving money has become the top concern in the minds of many consumers these days. Through the ups and downs of the economy, more people are finding out that there is nothing more shielding than to be financially prepared. Having a sufficient amount of savings will benefit you more than any type of loan made available for your convenience. So, if you feel the need of a tax refund loan, consider other options first before making a final decision. Your wallet will be thankful for it.

Start Your Payday Loan Application HERE!

Tax season is here, and some people may be wondering whether the quick cash of tax refund loans is right for them. The plain and simple answer to that question is that if you don’t mind giving up an expensive chunk of change, go for it. Otherwise, if you’d like to have access to fast consumer credit during a cash emergency, payday loans are a less expensive route in that they are generally free of “fees upon fees” and the charges levied by less than scrupulous tax preparers.

Even the IRS views tax refund loans with suspicion

The Web site Consumer Affairs reports that one of the biggest RAL institutions in the game – Santa Barbara Bank & Trust – has been ordered out of the tax refund loans business by federal regulators. Santa Barbara Bank & Trust was the money man for Jackson Hewitt’s tax refund loans, so now that big-name tax preparation company has to scramble to find funding for over half its locations. Republic Bank & Trust, another big tax refund loans player, has dropped their RAL prices as the industry faces the heat of consumer advocates.

8.4 million American taxpayers were robbed in 2008

By Consumer Affairs’ count, tax refund loans drained $738 million from their hard-earned tax refunds in 2008, just so they could receive their money a few days earlier. What an unnecessary expense; and that doesn’t even take into account $68 million in “other fees.” Then there were 12 million more people who gave up $360 million on products similar to tax refund loans. Consumer groups like the National Consumer Law Center and Consumer Federation of America are sounding the alarm for taxpayers to wake up and smell the tax refund loans ruse.

An IRS task force is examining tax refund loans

Until they’ve put this ultra-expensive product down like Ol’ Yeller’s evil twin,  here some tips to avoid tax refund loans, RALs, RACs or whatever name tax preparers looking for a buck call them.

• File electronically to get your refund more quickly. Wait a week or two and you can save green!
• If you need help, use free sites offered by places like Volunteer Income Tax Assistance and the National Community Tax Coalition. Call the IRS at 1-800-829-1040 for more info. IRS Free File is also a place you should know about.
• Have your refund direct deposited. As check cashers typically charge two percent or more, it pays to have a checking account at a bank or credit union. Why pay $60 to cash a $3,000 refund check when you don’t have to?
• Know what you’re signing if you use a tax preparer. They can easily share or sell your tax return information, so if you see anything that gives them permission to do so, JUST SAY NO.

Tax refund loans can be dangerous; why not consider payday loans?

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