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FOR
IMMEDIATE RELEASE |
CONTACT: |
CONSUMERS
UNION ADVISES TAXPAYERS TO AVOID REFUND LOANS
Consumers
Can Get Quick Refunds Without the High Cost of Tax Loans
Consumers Union, the nonprofit publisher of Consumer Reports, is advising consumers to steer clear of refund anticipation loans (RALs), which are being widely marketed this tax season. RALs are short-term cash advances that provide cash against a customer's anticipated income tax refund. But the loans are offered at high interest rates and speed up refunds by just a week compared to what consumers can expect by filing online and having their refunds deposited directly into their banking accounts.
"Refund anticipation loans are a bad deal for consumers because the annual percentage interest rates can run in excess of 700 percent, depending on the size of the taxpayer's refund," said Shelley Curran, a Policy Analyst with Consumers Union's West Coast Regional Office. "These high interest rates are simply unjustified given that the refund loan is based on a tax return for which the consumer has already paid a fee."
The cash advance is the amount of the anticipated tax refund less a fee, which is retained by the business making the advance. In the event of a mistake with the tax filing, the consumer is responsible for any discrepancy between the amount of the loan and the actual refund.
H&R Block, which is marketing it's refund anticipation loan product aggressively, notes on its web site that RALs allow tax filers to get their refund checks in two days. If the same consumer filed her taxes electronically and had her refund deposited directly into her bank account, she would receive the funds in as little as ten days. In other words, the consumer pays a high fee to receive her refund eight days earlier.
According to a recent report by the National Consumer Law center (NCLC) and the Consumer Federation of America (CFA), the fee for a loan for a $1,980 tax refund, the average federal tax refund in 2002, is $75. Including an additional average electronic filing fee of $40, the interest rate on such a transaction calculated as an annual percentage rate is 222.5 percent.
"The interest rates on refund anticipation loans are far higher than the rates charged by most credit card companies for similar short-term transactions," said Curran. "In other words, you're better off using your credit card to cover necessary expenses while you wait for your refund to arrive than borrowing money through a refund anticipation loan."
Consumers Union notes that these high fees are especially egregious since a large number of refund anticipation loans are taken out by low income tax filers. An estimated forty percent of consumers who get RALs receive the Earned Income Tax Credit, one of the federal government's largest anti-poverty programs. About $363 million from the Earned Income Tax Credit will be used to pay refund anticipation loan preparers. This amount does not include the fee these filers pay to have their taxes prepared.
Low and moderate income taxpayers with incomes of $34,000 and below can avoid these high fees by taking advantage of free tax preparation services available through the Volunteer Income Tax Assistance (VITA) program. The IRS has trained VITA volunteers equipped to prepare and file tax returns electronically. VITA program sites are located in neighborhood libraries, shopping malls, and community centers. Taxpayers can locate the nearest VITA site by calling the IRS at 1-800-TAX-1040 or 1-800-829-1040.
"By taking advantage of the free tax preparation services available nationwide, low and moderate income taxpayers can avoid theses high fees and get the full benefit of the Earned Income Tax Credit," said Curran. "That means more money in their pockets to keep food on their tables and take care of other important family expenses."
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