Well, tax season is upon us again, and it’s a safe bet that it’s the least favorite time of year for many Americans. As stressful as the filing process can be, we breathe a sigh of relief when we receive a refund. For some, those funds are critical to meeting immediate goals; however, there can be a huge cost if you take out a refund anticipation loan. Refund anticipation loans have been under scrutiny by the IRS and others for some time, so much so that 2012 may be the last year many financial institutions will offer these products. Let’s take a look at what you need to consider when faced with the option of taking one of these loans.
A rapid refund loan is a short-term loan, generally in place for just a few weeks, which is secured against your refund. Many tax preparers have advertised that filers can receive their refund the same day as they submit their taxes, which is one of reasons these loans landed on the IRS’s radar. What filers are receiving is not a refund, but a loan based upon their ‘anticipated’ return. The refund anticipation loan hinges on an estimate made by the tax preparer, not a statement from the government. This can put you in a bad spot if your refund doesn’t come through as expected. For instance, the IRS can seize a portion of, or your entire, refund for a variety of reasons, including back taxes, delinquent student loans, child support arrearages or other wage enforcements. Your preparer could also miscalculate your return. If your refund is not in the amount you anticipate, you now have a loan to deal with. Every year, some people find themselves in the unfortunate position of having to take out a series of successive loans, piling up hundreds of dollars in fees, because they don’t have the refund they thought they’d receive, and their loan has come due. This leads us to the second thing you must consider, the actual cost of the short-term loan.
Some experts feel that applicants haven’t been adequately informed about the true costs of their loan. The IRS and regulatory bodies have strongly advised against rapid refund loans because of the high rates associated with these products. Depending on the lender, interest rates can fluctuate between 40% and 700% of the refund. Granted, some people may feel that the costs associated with their loan are acceptable – they obviously need cash immediately, and the cost may not be an object. I would suggest that these people need to consider not only the interest rate on their loan, they also need to think about the opportunity cost. An opportunity cost is the cost of an activity measured against the value of the next best alternative.
For example, Republic Bank & Trust Company, the one of the remaining rapid refund lenders, offers a loan of $1,500 for a fee of $61.22, which, if annualized, translates to 149% interest. Sure, you may want some of that money now instead of waiting 14 days, but should you spend $61 of your own money to get your refund now? That’s one expensive ‘ATM transaction.’ You may decide, like I would, to wait two weeks and put the $61 you’d save toward some of your bills, or better yet, into a savings account.
If you need your refund quickly, consider some of these options. First, get your taxes done sooner rather than later. One of the easiest ways to complete you taxes in a jiffy is by using an on-line service, like IRS’s Free File. You can use the site to file your federal taxes for free, providing your Gross Adjusted Income is less than $57,000. Some online providers also help you prepare your state returns, though there may be a nominal fee associated with that portion of your return. If you e-file and request auto deposit into a bank account, you can have your return in about a week. If you don’t have a checking or savings account, which you should, you can have your refund applied to a prepaid card. You can have your refund deposited on any prepaid or payroll card you already own; however, a word of caution if you’re considering purchasing a prepaid card. There are a variety of cards with fluctuating fees. Be sure to compare products. CreditCards.com has a helpful Prepaid & Debit Card Search Tool located on their home page that can help you find the right one for you. Until next time, I’m Thomas Fox for Cambridge Credit Counseling. Happy tax season everybody, and many happy returns!