For many years consumer educators have been warning about tax refund loans – the “quick refunds” that put money in consumers’ hands the day after they file their tax return, but with high risk and excessive fees attached. These loans go by many brand names, but all can be described as “Refund Anticipation Loans” (RALs).
Last year we saw, for the first time, an even earlier version of a tax refund loan. Called a Pay Stub RAL or a Holiday RAL. This product is also marketed through tax preparers who estimate the consumer’s expected tax refund based on their most recent pay stub. These loans may be made in early January, before tax season officially begins, or as early as November!
These new, earlier RALs carry high costs and high risks. When calculated as an Annual Percentage Interest Rate, the loan cost often exceeds 100%, although at least one national chain offered these loans last year with fees equal to “only” 36%.
Apart from cost, the risk is great
Just because a tax preparer calculated or estimated a consumer’s tax refund, the refund is not guaranteed. A number of factors can cause a consumer’s refund to be lower than expected. Those include: forgetting to report some of their income, claiming a dependent who was also claimed by someone else, owing money to the IRS or for old student loans or back child support.
Example: If a consumer receives a $3,000 loan, expecting that it will be repaid when their $3,000 tax refund is received, but due to some unforeseen problem their actual tax refund is only $1,000, then they will need to repay (quickly) the remaining $2,000. That is a risk most tax refund borrowers do not consider.
Family Matters Newsletter; Meridith
1/23/2008