Millions of Americans, unable to practice patience, are either considering or already opted for a rapid refund loan. What makes this year different is the high fees that folks are paying. You need to know about these fees before you take that leap away from patience and opt for quicker cash.
Refund Anticipation Loans
Refund anticipation loans (which, by the way, isn’t the preferred term) have been around for years; they’ve served very definitive purposes for taxpayers who are strapped for cash or simply don’t want to wait weeks for their tax returns. While many have decided to play it safe this year, partly because of the fiscal cliff and sequester disasters, there are still some who are willing to roll the dice.
In short, refund anticipation loans are offered by companies – usually tax preparers – that allow the customers to access to their money right away. When the returns come in, they are used to pay off the short term loan. In recent years, though, new banking laws have changed the way these companies conduct these business practices. These days, even payday loan companies are getting in on the mix and because they’re not as heavily regulated, they’re able to bypass those new laws. That means they’re able to charge you higher fees than what you’ve had to pay in the past. This, according to a new report from the National Consumer Law Center and Consumer Federation of America.
One Bad Product After Another
An attorney with the National Consumer Law Center summed it up,
While we are glad to see the disappearance of bank refund anticipation loans, consumers should avoid the other traps still out there,
said Chi Chi Wu. The report also provides tips on how to use these financial products as well as specific companies that are passing down incredibly high fees to desperate taxpayers. One of those companies, Liberty Tax Service, is said to offer these loans in at least 26 states. These taxpayers must pay a $50 processing fee along with interest rates it refuses to disclose. Historically, these fees have hovered around 36%. For a $2,000 loan, that taxpayer could easily pay close to $150 for a loan that’s typically paid off in less than 30 days. And what happens if the IRS has a delay in getting the refund processed? The taxpayer must provide further fees after the first thirty days.
Also, even the more well known and established tax preparer companies are getting in on the act. Jackson Hewitt has offered similar products in the past and this year, it released a new fee structure. It’s tax-time credit lines fall between $200 and $1,000. These also come with a 35% interest rate, a $6.25 monthly fee and a fee of 3% or $10 every time the credit line is accessed. This information is easily found on its website, as are the other companies offering similar products.
Percentages of Refunds Consumers Actually See
And here’s another troubling trend: some companies are willing to shell out the funds, but only part of what the taxpayer expects to receive. When the refund is received from the IRS, the company will deposit the refund in its entirety into its own accounts. The worse part is the demand of these products. It’s clear that many are still struggling with the economy and are likely living payday to payday, which leaves them vulnerable for these costly loans. They’re able to gain access to their money, usually with two days, while the tax preparer to payday loan company shoulders the typical wait time.
Still other efforts include downright fraudulent behaviors. The offerings are advertised and once the taxpayer comes into the office, they learn they often have to sign up for costly services from the tax preparer. In fact, some refuse to even lend funds if the consumer isn’t willing to allow someone else to handle the logistics.
It’s both unethical and in some instances illegal to engage in these types of business practices, but when taxpayers are strapped for cash, many are willing to do things they wouldn’t ordinarily consider, such as paying high fees to access money that already belongs to them.
The problem is that people who are desperate are very vulnerable when dealing with lenders,
There’s another problem, too. Many can’t differentiate between refund anticipation loans and refund anticipation checks. The latter are usually more affordable – but it’s not always the case. These can still include high fees, but for now, anyway, it looks as though these might best suit many consumers. Also, there exists the problem of under and unbanked Americans. Many of these products require some type of direct deposit option. That’s not always feasible and usually, it’s lower income households – the very ones who need the money most – who hit these kinds of stumbling blocks.
So what can consumers do? First, they should strongly consider waiting out the traditional channels of receiving their tax refunds. For those who don’t wait to the last minute, they can usually get their federal tax refunds within a few weeks. That might a hard sell this year, though, simply because of the uncertainties associated with the new tax laws. There are also many free options that include tax preparation and online filing. The IRS Volunteer Income Tax Assistance program is just one of those options.
For those who are against a wall and can’t afford to delay the refund, at a minimum, they should check with the Better Business Bureau and other places where they can verify the quality and ethics of any of those companies offering quick refunds and other costly services. Be sure to explore the terms and conditions as well. You’ll want to ensure you understand all of the fees, interest and other costs associated with a rapid refund loan.
Have you ever used a rapid refund loan program? Was the higher costs worth it? Do the ongoing sequester problems pose a problem for you? Let us know your thoughts. Like us on Facebook and follow us on Twitter, too.