Are you anticipating an income tax refund this year? If you are, and you use one of several income tax preparers, chances are they will offer you an anticipation loan refund. You may want to think twice before you take them off on their offer.
What is Refund Anticipation Loan?
A refund anticipation loan is a high cost loan that is secured by what you anticipate from your income tax refund, based on completed income tax documents.
Who typically gets Refund Anticipation Loans?
Refund Anticipation loans are generally geared toward the working poor who typically live from paycheck to paycheck. They consider their income tax return to be found money and are willing to pay to get it quicker. They seldom acknowledge the money that is lost in the process. These people usually receive Earned Income Tax Credit (EITC) which is a refund intended to give the poor an extra income boost. People who get these loans lose these dollars in exchange for getting their income tax return faster.
What is the interest rate on Refund Anticipation Loans?
On the Average refund of $2,043.00, the average borrower pays an average of $90.00 in Refund Anticipation Loan Fees. If a borrower uses ‘same day’ or ‘instant money’ services as are offered by H R; Block, or Jackson Hewitt, fees can be much higher. This can cause the APR to be as high as 245% including administration fees.
Is the IRS doing anything to stop Refund Anticipation Loans?
Because the charges are labeled as fees and only a small amount is called interest, the refund anticipation loans are legal. However, the government however has put restrictions on how much can be charged. The IRS is also trying to get the word out to let low-income users know that they can file free without purchasing additional services such as Refund Anticipation Loans.
If I need my money back quickly, should I get a refund anticipation loan?
Back when Refund Anticipation Loans first came onto the scene, tax return processing could take 4-6 weeks. For people who needed money quickly, it made sense to take the Refund Anticipation Loan. However, the current waiting time for an electronically submitted tax return refund is 7-10 days and the money is deposited directly into your account. It makes absolutely no sense to pay so much for the convenience of a one-week wait.