Advertised by tax preparers as instant, rapid or fast refunds, they are actually refund anticipation loans. These loans are processed by a bank that has a relationship with the tax preparer. These are expensive loans and taxpayers who use them are actually paying to borrow their own money.

Facts and Fees

According to information compiled by the Consumer Federation of America, the National Consumer Law Center, the IRS and the Better Business Bureau, Refund Anticipation Loans cost from $29 to $120 and some tax preparers charge an application or administrative fee. Same day or “instant” refund loans cost an extra $20-$45. The effective annual percentage rate varies depending on the refund amount and the total fees charged, but ranges from 40% to 1800%, yes that is eighteen hundred percent. These are not misprints. Refund anticipation loans may have the highest APR of any legal loan. Even the APR of an expensive payday loan tops out at about 260%. In 2004, 12.38 million taxpayers paid a total of 1.24 billion dollars to banks and tax preparers to borrow their own money. None of these fees includes the amount that tax preparers charge to prepare and file taxes.

Alternatives to Refund Anticipation Loans

Improvements made by the IRS in processing returns have reduced refund wait times significantly. Taxpayers who file electronically and supply the IRS with their bank account information can receive refunds deposited directly into their bank account in about ten days or less. Those taxpayers who file electronically, but have no bank accounts will receive their refunds in about two weeks. The IRS and the Free File Alliance provide free web-based electronic filing for taxpayers who earn less than $50,000 annually. For those taxpayers who do not own a computer or do not have internet access, taxes can be filed by phone and will be processed just as quickly as those filed on line. There are also volunteer income tax assistance sites at most libraries and community centers during tax time. Another inexpensive option is to prepare tax returns at home and pay a tax preparer to file them electronically.

More Facts and Things to Consider

Low income families seem to be more likely to use refund anticipation loans than higher income families. In other words, those who can least afford to lose a portion of their income tax refund are more likely to fall for the “fast cash” advertising. In 2004, over 56% of all refund anticipation loans went to tax payers who received earned income tax credits. Only 17% of all taxpayers qualify for earned income tax credits. These loans can cause big credit problems. If the taxpayers refund is denied, frozen or smaller than expected, the taxpayer is still responsible for the entire amount of the refund anticipation loan. If the taxpayer does not have the money to pay the loan back (which is often the case), then the bank that issued the loan will attempt to collect and report the issue to the credit bureau. In some cases, the tax refund from the following year has been taken to pay off the refund anticipation loan. It can become a vicious circle. Taxpayers should consider waiting a couple of weeks and saving not only their money, but possibly their credit rating as well.