Photo (cc) by Jesse Wagstaff
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.
- File electronically: that’s much faster than paper.
- Second, use direct deposit. Combining those two things can get you your within 8 – 15 days. If everybody did this, refund loans would be obsolete.
- Third, if you’re getting big refunds, amend your W-4 to have less withheld on your paychecks. There’s an online calculator at the IRS website that will help.
- Finally, avoid temptation by avoiding tax preparers who peddle these services: find services that will prepare your return free.
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.