Difference Between a Loan Shark and a Tax Refund Loan? Not Much.

You wouldn’t borrow from a loan shark operating out of a downtown pool hall. You wouldn’t borrow from that payday loan place next to the liquor store. You wouldn’t hock grandma’s china at the pawn shop down by the tracks.

Then why would you get an income tax refund anticipation loan from your tax preparer?

The tax preparation service you use may be in nice part of town. But the short-term loans they offer to get your tax refund into your hands a few days earlier often offer interest rates that rival those of less-savory lenders like those above.

Watch this 90-second news story I did about tax refund loans, then meet me on the other side for more.

Every year Americans take out loans on their tax refunds…and every year tax preparation companies rake in millions in interest and fees. In years past, one might have argued that they served a genuine purpose, because they allowed people fast access to a tax refund that might be weeks away. But these days they’re largely useless because, thanks to modern technology, most people have access to their tax refund in days.

Refund anticipation loans have been under fire for years: the protest you saw in my news story was ACORN video from 2003. Why the hubbub? Because, like many short-term loans with high rates, these loans are often targeted at those least likely to be able to afford them: the working poor. Rates can range from 30 to 200% just so people can get their own money a few days sooner.

In recent years these loans have finally started getting the negative attention they deserve. Giant tax preparation companies have been sued for the way they market them. (Do a search for “refund anticipation loan lawsuit” and you’ll see what I mean.) And the IRS started checking them out as well: in 2008 they started issuing guidance on how they’re marketed. This year the IRS is also sending letters to 10,000 tax preparers reminding them of their responsibility to their clients and proposing new competency guidelines.

But don’t wait for the IRS to create a more professional tax-preparation industry: take care of yourself. Don’t take out a refund anticipation loan. Need your money fast? Use this simple system to get it.

To be fair to those who offer these loans, there are lots of Americans who don’t have a bank account and therefore can’t use direct deposit. There are also many who desperately need the money and insist on using one of these loans to get it ASAP: they won’t go to a service that doesn’t offer them. And while the interest percentage is big, the actual dollars aren’t: interest and fees for an anticipation loan on a $3,000 refund are normally less than $100.

Still, as I said in the video above: You’ve already lent your hard-earned money interest-free to Uncle Sam. Now you’re supposed to turn around and pay huge interest just to get it a few days earlier? Try to avoid it. Stay focused on the goal: having more money. Refund anticipation loans only result in having less.

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Comments & discussion

We welcome your opinions, but let’s keep it civil. Like many businesses, we reserve the right to refuse service to anyone. In our case, that means those who communicate by name-calling, racism, using words designed to hurt others or generally acting like an uninformed bully. Also, comments that include links to email addresses or commercial websites typically aren't posted. This isn't a place to advertise your business.

  • D.D.

    You can get a $2,800 RAL from H&R Block for $62. Compare that percentage to me being charged $3 to take $50 OF MY OWN MONEY out of the bank. Yet you compare that to a loan shark. These are "targeted" to lower income individuals because unlike out-of-touch overpaid reporters, they are most likely in need of their money now. I love how people like you judge the tax companies and the consumers as if both sides are stupid when you don't know the situation. Time is a function of money and money is a function of time. Sometimes it makes more sense and costs less in the long-run to get a RAL or RAC. THE REAL ISSUE are those companies charging 300%, not being upfront on this being a loan, and charging hidden or administrative fees. THAT IS THE CRIME – not offering the product itself.

  • D.D.

    You can get a $2,800 RAL from H&R Block for $62. Compare that percentage to me being charged $3 to take $50 OF MY OWN MONEY out of the bank. Yet you compare that to a loan shark. These are "targeted" to lower income individuals because unlike out-of-touch overpaid reporters, they are most likely in need of their money now. I love how people like you judge the tax companies and the consumers as if both sides are stupid when you don't know the situation. Time is a function of money and money is a function of time. Sometimes it makes more sense and costs less in the long-run to get a RAL or RAC. THE REAL ISSUE are those companies charging 300%, not being upfront on this being a loan, and charging hidden or administrative fees. THAT IS THE CRIME – not offering the product itself.

  • Richard

    Mr. Johnson is certainly entitled to steer taxpayers away from loans but he should do so accurately.
    He says that by filing electronically and having your refund direct deposited, you can receive your refund in "less than a week." But the IRS's own "Refund Cycle Chart" (http://www.irs.gov/pub/irs-pdf/p2043.pdf) gives the time as 8-15 days and says "The IRS does not guarantee a specific date that a refund will be deposited into a taxpayer’s financial institution account or mailed." So not "less than a week."
    And millions of tax filers don't have a bank account, so can't get a direct deposit and have to wait for 3-8 weeks for a mailed IRS refund check.
    For families with urgent financial needs, those delays can be harmful. The RAL may be a one-time solution. Not for everyone, but not unreasonable for those with special needs.
    Fees are comparable to many other loans–usually less than a credit card cash advance (3%), for example, and the price of an average RAL ($3,000) equals a bit more than a tank of gas ($62). Compared with disconnected utilities, late fees for rent or credit cards, or damage to a credit rating, that may be a bargain.
    The government should ensure that we have well-regulated credit offered ethically and with full disclosures by competent professionals for those who really need it and consumers should be educated about the benefits as well as the costs of these products.

  • Richard

    Mr. Johnson is certainly entitled to steer taxpayers away from loans but he should do so accurately.
    He says that by filing electronically and having your refund direct deposited, you can receive your refund in "less than a week." But the IRS's own "Refund Cycle Chart" (http://www.irs.gov/pub/irs-pdf/p2043.pdf) gives the time as 8-15 days and says "The IRS does not guarantee a specific date that a refund will be deposited into a taxpayer’s financial institution account or mailed." So not "less than a week."
    And millions of tax filers don't have a bank account, so can't get a direct deposit and have to wait for 3-8 weeks for a mailed IRS refund check.
    For families with urgent financial needs, those delays can be harmful. The RAL may be a one-time solution. Not for everyone, but not unreasonable for those with special needs.
    Fees are comparable to many other loans–usually less than a credit card cash advance (3%), for example, and the price of an average RAL ($3,000) equals a bit more than a tank of gas ($62). Compared with disconnected utilities, late fees for rent or credit cards, or damage to a credit rating, that may be a bargain.
    The government should ensure that we have well-regulated credit offered ethically and with full disclosures by competent professionals for those who really need it and consumers should be educated about the benefits as well as the costs of these products.

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  • pete0097

    Loan sharks are also generally nicer people. They sometimes loan money at interest rates BELOW those of the banks. In addition, they typically only loan to people that they anticipate will pay them back, unlike the banks that will loan to everyone so they (the loan officers) will get a bonus for writting the most loans. The bank loans go bad and the taxpayers end up paying the bill because the banks are “too big to fail”, whereas the loan sharks get their money (with some prompting) and get nothing from the taxpayers.

  • http://cashadvancesus.com/ cash advance

    These loans are similar to loans you can get from loan sharks except that there is no risk to the lender. The lender or tax preparer give a tax filer who has a refund coming to him the opportunity to receive his refund within a couple of days through a loan. Then, when the refund comes in- paid to the tax preparer- the tax preparer subtracts the amount of the loan and some fees from the refund and distributes the rest to the tax filer. Because of the short time frame for the loan, sometimes only a week or two, the fees that the tax preparer charges equate to interest rates in the hundreds of percentage points on an annual basis.