Monday’s tip from Money Mom: Don’t borrow your tax refund Posted by money mom at 01/07/08 12:03 PM

Money Mom says: Stay away from offers to get your tax refund instantly. This is not a faster tax refund, it is a high cost loan.

Don't pay a loan fee. Get your tax refund quickly after filing your return without taking out a loan. You can do this by signing up to have your refund directly deposited to your checking or savings account. You can even split your refund so that part of it goes into checking and part of it goes right into a savings account.

Every year, the National Consumer Law Center and the Consumer Federation of America issue a report showing just how much of families’ hard earned money disappears in fees for tax refund loans, called Refund Anticipation Loans. This year’s report isn’t out yet, but last year these groups estimated that 9.6 million U.S. consumers paid $ 960 million in loan fees to get their tax refunds one to two weeks sooner than if the consumer had filed electronically and arranged for direct deposit of the refund instead.

A short term loan tied to your anticipated tax refund is an expensive way to borrow money. Last year’s report showed loan fees of from $30 to $125, depending on the tax preparer. This means an annual percentage interest rate of about 40% to over 500%.

Tax refund anticipation loans carry another risk. Because the instant refund is really a loan, you’ll still have to repay it even if your tax refund is less than you expected. This can cause problems with debt collectors and with your credit report.

Consumers who made $54,000 or less in 2007 can use the IRS free file program to file electronically, speeding their refunds without taking out a loan. Learn about it at: http://www.irs.gov/efile/article/0,,id=118986,00.html. If you qualify, you can use the IRS free file service starting in mid-January.

You might be eligible for more help. Low income, elderly, and disabled consumers may get tax preparation help at a VITA location in their communities. VITA stands for Volunteers in Tax Assistance, and these volunteers are certified by the IRS and provide free services. Go online to search for a VITA location in your area, or watch for signs at your local library or community center.

comments (1)

1 Posted by Katy (Taxmom) at 01/07/08 06:19 PM

I worked for a national tax chain for a season or two several years back and what shocked me was that even the preparers occasionally went for the refund anticipation loans (RALs)! I was constantly trying to sell my clients on the advantages of direct deposit over refund anticipation loans. (Guess that explains why I didn't make my commission.) I believe over the past few years the same company has been forced to drop the RAL fee, which simply means of course that all clients are paying (in the form of higher tax prep fees) for the RALs being provided to clients who take advantage of them. Of course one reason why clients don't go for direct deposit is they may not have a bank account. So they pay even more, in the form of check-into-cash fees, to cash those RAL checks.