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Refund loans: Goodbye and good riddance

Another awful product is finally getting flushed down the drain. This is the last year any major tax prep service will offer refund anticipation loans, where fees can equal 150% interest.

By Stacy Johnson Feb 21, 2012 11:45AM

This post is from Brandon Ballenger at partner site Money Talks News. average tax refund was just under $3,000 last year, and some people just couldn’t wait to get it -- so they didn’t. And they paid the price.

Millions applied for what are called "refund anticipation loans." These are high-cost, short-term loans targeted mainly at the working poor. The fees they charge often work out to an annual percentage rate of more than 100% -- simply to let you use your own money a few days sooner.

Fortunately, these things are on the way out, as we first explained in Death of the Refund Anticipation Loan? a year and a half ago. According to the National Consumer Law Center, this tax season is the last time any large-scale nationwide tax preparers will offer RALs.

In the video below, Money Talks News founder and CPA Stacy Johnson celebrates a little -- and then explains why consumers don’t even need these loans. Check it out, and then read on for more. (Post continues below video.)

Why RALs are dying


Stacy has criticized these loans -- from major tax preparers like H&R Block and Jackson Hewitt -- for the past decade. (He's also recently argued that most people don’t even need tax pros.)

So Stacy and a lot of other folks will be glad to see refund loans go away -- except, of course, the tax preparers and their partner banks who made a killing off them. But what made them stop? In the final analysis, it was the IRS.

How refund loans work


A refund loan is nothing more than a bank loan, offered through a tax preparation service, secured by your impending refund.  But just because you're entitled to a refund doesn't mean you'll actually get one. For example, if you have a delinquent student loan, owe back taxes for previous years or are otherwise are indebted to Uncle Sam, the government will claim your refund.

So before a tax preparer offers you a refund loan, they want to make sure you're going to get a refund. In the past that was easy, because the IRS would furnish preparers a filer's “debt indicator,” which let the preparer know whether or not the person filing a return owed the government money.  If the indicator came back "clean," the preparer gave them the loan.

But with the 2011 filing season, the IRS announced it was going to stop providing that information.  As you might imagine, this made these loans much riskier for preparers and the banks they partnered with. So the banks started backing out, until finally there were just a few left -- and those set more restrictions to minimize their losses, meaning fewer people could get the loans.

Today there’s just one bank still offering refund anticipation loans (the Republic Bank & Trust Company in Louisville, Ky.) and just one preparer offering them (Jackson Hewitt).  According to the National Consumer Law Center, getting a $1,500 anticipation loan from Jackson will result in a fee of $61.22.  If that loan is outstanding for only 10 days -- about the time it takes to get a refund via electronic deposit -- that equates to an annual percentage rate of 149%.

You can see why consumer advocates have hated these loans. And thanks to a government settlement, even Republic Bank is calling it quits after this year, leaving tax preparers high and dry.

Rip-offs after RALs


Unfortunately, the National Consumer Law Center reports tax preparers have a backup plan -- "refund anticipation checks," designed to target people without bank accounts. In a report on the death of refund anticipation loans, the consumer law center highlight the refund anticipation checks: "Tax preparers and banks will continue to offer RACs, for which the banks generally charge about $30 to $32. Tax preparers may also charge their own 'add-on' fees, which can range from $25 to several hundred dollars."


These are basically temporary bank accounts, and they’re no faster than you could get the refund on your own. The fees aren’t as bad, basically cut in half. But that’s like saying you prefer a slap to a punch in the face -- you’d probably rather not be hit at all. And you don’t have to be.

Get your refund fast and free


Taxpayers who file electronically and sign up to have the refund direct deposited into their bank account will have the refund in as little as two weeks, sometimes less. Virtually everyone offers e-filing now, and if they don’t do it free, you can always plug your numbers into the IRS’ online free file forms. And if your income is under $50,000 a year or your age is over 60, IRS volunteers will not only help you file taxes free, they’ll also prepare them free as well. You can look up free tax prep in your area at the IRS website.

Those without bank accounts still have the option to e-file and use a prepaid card to receive a refund. If you already have one, great. If not, read the fine print first: Even prepaid cards have fees.

Another idea, which Stacy mentioned in the video, is to change your tax withholding. If you tend to get large refunds every year, you’re probably having too much tax taken out of your paychecks, which amounts to giving the government an interest-free loan. Why wait all year to get your money back? Here’s how to fix it: Get your pay stubs together and use the IRS withholding calculator to fill out a new Form W-4, which you turn in at work.

After that goes through, you’ll start seeing slightly bigger paychecks, and a much smaller tax refund -- which means you’ll have your money when you need it, instead of giving it away to either the IRS or some tax company. Just be sure to put that extra income to good use.

More from Money Talks News and MSN Money:



Mar 1, 2012 10:37AM

I am so tired of financial advisors telling me that getting a large refund is bad. I got 7000 back this year which translates into 500 a month.  Savings accounts pay almost nothing and i don't want it in stocks or bonds.  And if its in my check, i have a tendency to spend it.

i have an emergency fund and fully take advantage of my companies 401k match.  I don't have any debt except one car and my mortgage.

That check will go to pay off daughter's wedding this year.  In past years it has gone for son's wedding, travel to see relatives, appliances and other big ticket items.  The few years i haven't had something specific i treat ourselves to something fun with some of the money and then just throw the rest into savings.

Next years is already planned to pay off car and put the rest towards a new one. I drive my cars til they become to expensive to keep running , my Volvo has 220k on it and the Hyundai has 125k.  The Volvo is still running well but i really know its just a matter of time.  So i may have 3 running cars next year for 2 people!


Mar 1, 2012 10:45AM

In the interest of full disclosure, let me point a few things out.  First, no one forces anyone to take a Refund Anticipation Loan.  The customer has to request it and is made fully aware of all of the fees and the interest rate.  One should mention that $45 of the $61.22 fee is for a credit investigation performed by the bank.  This has been made necessary because the IRS stopped providing what were called 'debt indicators'.  These indicators were used by the banks to decide if the taxpayer was eligible for the loan.  It's unfair to put the blame on the tax preparer or the company that does the work.  It's an individual decision and, if no one wanted them, they would go away.   Oh, yes, I'm a tax preparer and I have been trained to fully inform my customers about the fees and interest they will have to pay to get any kind of bank product.  I take pride in my work and we do our best to get the best possible outcome for our customers. 

Feb 22, 2012 4:26PM
Didn't really think they were going to stop this gravy train,did ya?
Mar 1, 2012 12:28PM
Sorry Commentator_Dean, but that sounds to me like saying "no one forces anyone to participate in a pyramid scheme, and they're made fully aware of the costs involved".  With 100% interest, if you can't afford to wait for your refund, then you can't afford to pay off a refund loan. By the same token, if you can afford a refund loan, it probably wouldn't kill you financially to wait. And that's assuming you even get said refund, which as the article says, is no guarantee. It's like getting a payday loan only to get fired the next week. Seems to me that schemes like this benefit the likes of you more than they benefit the customers who buy into them.
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