Bloomberg’s Jason Breslow reports that Americans are eager to be bamboozled and duped by the lure of tax refund loans. On the side of sanity, only a small amount of research and the sense of a rabbit will reveal that they are exceedingly expensive. It’s better to wait until your automatic refund and not buy into tax preparer propaganda that “millions” of wage earners who earn enough to be taxed don’t have checking accounts.

Yet the troubling trend continues. More Americans applied for tax refund loans in 2007, reversing two years of declines, according to the Consumer Federation of America and National Consumer Law Center. Many are using it to help them pay their bills, a mistake that could easily be rectified if they knew about short-term cash advance loans.

Desperation

“You probably have increased demand because more people are struggling with debt,” said Ira Rheingold of the National Association of Consumer Advocates. “When people are desperate for cash, they’re desperate for cash.”

Tax refund loans are secured loans tied to an expected tax refund. Tax preparers and other lending outlets typically use a taxpayer’s pay stub or car title as collateral. Almost nine million Americans (one in 15 taxpayers) paid around $901 million during the 2007 tax filing year for refund loans. That’s in fees alone, and it’s a staggering amount.

Why? Why?

Chi Chi Wu, a staff attorney at the National Consumer Law Center, stresses how unnecessary tax refund loans are. Yes, they deliver money in one or two, but with a little bit of planning, perhaps budget problems can be avoided. E-filing yourself ensures a full refund with no fees or deductions like those associated with refund loans, and it can go directly into your bank account in less than 15 days.

If 15 days are too long to wait, consider cash advance loans. With a bank account and documentation of steady employment, you can typically get up to $1,500 same day if you qualify. Depending upon the lender, the service fee ranges from $15 to $25 per $100 loans, which amounts to 15 to 25 percent paid in fees. That’s it. It’s easy, and studies have shown that people who use these loans are in no way on the road to bankruptcy because of them.

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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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