With many eager to get extra cash fast these days, an income tax refund loan can be pretty tempting. Some tax preparers entice consumers with the promise of reducing refund wait times from weeks to days and, in some cases, the same day.
But consumer advocates warn that such haste can lead to waste: hundreds of millions of dollars on loans that are needless and costly.
Taxpayers threw away roughly $900 million in 2007 on refund loans and related fees, according to consumer groups. But most consumers can receive refunds in as few as 10 days — for free.
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Sound like a better deal?
Both the National Consumer Law Center and the Consumer Federation of America think so, and are urging taxpayers to hang on to more of their money by avoiding refund loans and filing for their refunds electronically for free.
Income tax refund loans have declined slightly in recent years. But consumer advocates are concerned that the dire economy and aggressive marketing might lead to an uptick this year.
“[Consumers] need to understand that it’s a loan, not a faster way to get your refund,” said Chi Chi Wu, an attorney with the National Consumer Law Center. “Taxpayers are paying to borrow their own money.”
Refund loans are offered by banks through tax preparers and are secured by the taxpayer’s anticipated refunds. The loan fee, which may be called a refund account fee, can range from $34 to $130, according to the consumer groups. Then there are the additional fees some tax preparers tack on: application fees, administrative fees, transmission or processing fees.
Then there are the interest rates, which can add hefty costs. The annual percentage rate for a refund loan can range from 50 percent to 500 percent, according to the consumer groups. In some cases, you could be looking at an interest rate as high as 1,300 percent.
Consumer advocates say such loans are targeted at low-to-middle-income taxpayers who can least afford markups. Nearly 85 percent of consumers who take out refund loans are low-income, according to the consumer groups.
Illinois Treasurer Alexi Giannoulias said such loans often prey on people who don’t understand the costs involved. In most cases, he said, consumers who take out such loans aren’t in dire financial need.
“If it really is an emergency and you need that money that day, obviously, people need to do what they have to do for their families. But very rarely is that the case,” Giannoulias said. “They’re just people who don’t know any better, who don’t know that there are free institutions that will help you out.”
One such institution is the Center for Economic Progress, which offers free tax preparation and financial counseling in 36 communities across the state. Executive director David Marzhal encourages taxpayers to wait and file their returns free through the IRS’ e-File option. Taxpayers with a bank account can have their refund direct-deposited in less than two weeks.
Doing so “reduces the need for all those lousy, marginal [loan] products,” Marzhal said.
Nancy Mays, director of communications for H&R Block, said her company encourages customers to e-file but said that it’s not always an option for those who have an emergency or who don’t have a bank account. She said the company does not target specific consumers for the loans.
“We agree completely that the least expensive and best way for a taxpayer to get their refund is to e-file and have the IRS direct-deposit into their bank account,” Mays said, adding that just 20 percent of customers take out a refund loan. “Maybe it’s a car repair, maybe it’s the rent that’s overdue. Walking out with that money sooner is going to help relieve that.”
But most of us can, and should, wait for our refunds. For those who are in a pinch and think a refund loan is your best option, take some time to shop for the cheapest rates. That way, you can get the best of what otherwise is a bad deal.
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Tax help–for free
Need assistance filing your tax return? The Internal Revenue Service offers programs for low-to-moderate-income families and the elderly. To find a site near you, call 1-800-829-1040.
Taxpayers who live in Chicago can call 311 for a list of free tax preparation services in their neighborhoods. Many taxpayers are eligible to file their returns electronically for free at www.irs.gov. The IRS estimates that you could receive your refund in 10 days or less.
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Consumerland on the Web: To read previous columns by Kayce T. Ataiyero, go to chicagotribune.com/consumerland
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