Avoid The Tax Refund Loan

tax refund loan Many of you have already filed your taxes, and hopefully you used one of our preferred online tax software companies to do it so you have a chance to win a FREE iPad. One thing that I can’t stand about almost every major tax preparer/filer is that they peddle tax refund anticipation loans. These loans are bad news, but millions of Americans still apply for them and get ripped off in the process. Let’s take a look at a few reasons why refund anticipation loans should not be something you consider when getting your tax refund.

If You Need The Money Immediately, There’s a Problem

If you’re depending on your tax refund so you get a loan to have the money immediately, then you’ve got a big financial problem. Either you factored this money into your budget or you’re constantly straining to spend less than you make. Treat your tax refund like extra money that you weren’t expecting. Tax refunds are merely free loans that you gave to the government throughout the year, because your withholding wasn’t adjusted correctly. It was always your money, but don’t spend the money before you get it. If you’re spending more than you make on a regular basis, then your eyes will light up when you see a $1,500 refund, but you must attack the underlying problem: you need to get on a written budget and/or look for ways to increase your monthly income.

If you WANT the Money Immediately, There’s a Problem

Instant gratification has been viciously injected into our culture. We want our food quickly, we want our music instantly, we want quick service, and we get into the habit of never wanting to wait for anything. This is why the mentality of “buy now, pay later” is so popular in the United States. Why do you think so many companies offer “no money down” and “sign and drive” offers? It’s because we’re so tempted to get what we want right away. The refund anticipation is just another financial product that preys on this consumer weakness. I mean seriously, if you can’t wait two or three weeks to get your refund, you need to change your mentality.

The Interest is Ridiculous

In 2007, the Consumer Federation and the National Consumer Law Center reported that RALs cost the average borrower anywhere from about $30 to more than $125 in loan fees. Some tax preparers also charge separate fees on top of those amounts for the “application.” This last statement is from Money Smart Life who also did a piece on tax refund loans. $30 doesn’t sound like a lot of money, but when you think of it in the context of how long the wait period is and how much money that interest is on, we’re talking about an APR similar to rip-off payday loans. Essentially, it IS a cash advance loan, but it doesn’t feel like it, because it’s coming from a reputable company like H&R Block, not the local cash advance place with bars on the windows.

I’m being a little fiesty with this article, but I hope you’re getting my point about these refund loans. There’s no logical reason to get one. It’s less money in your pocket for an unneccessary convenience.

(photo credit: Newton Free Library)

Categories: Taxes

Erik Folgate
Erik and his wife, Lindzee, live in Orlando, Florida with a baby boy on the way. Erik works as an account manager for a marketing company, and considers counseling friends, family and the readers of Money Crashers his personal ministry to others. Erik became passionate about personal finance and helping others make wise financial decisions after racking up over $20k in credit card and student loan debt within the first two years of college.

Learn more About Money Crashers - including co-founders Andrew Schrage and Gyutae Park.

Elizabeth I

It would be really great if tax preparation companies assisted people in adjusting their w-4s which would reduce the large refunds.
- Erik Folgate
  
  Agreed. great idea Elizabeth.
http://madsaver.com Mac

I don’t understand why people still want a tax refund loan. Do your taxes, e-file, and receive your money a few weeks later. It’s amazing how efficient the IRS has become in their turn-around time. Glad I went with your idea and just considered it extra money…it all went into savings.
- Winston
  
  Wow, I didn’t know that there is such a thing as tax refund loan. Businessmen are really smart at creating various financial vehicles to make boatloads of money at the expense of average folks. And most of these are not really wealthy.
Molly

I definitely agree that RAL’s are a rip-off and the wrong way to go. But, not everyone is just getting back the money that they’ve paid in throughout the year. Many of the people who get the RAL’s are also receiving thousands of dollars in the Earned Income Credit. I think they think of it as “found” money and are willing to pay fees on some of it to get it instantly.

If you direct deposit your refund, you should receive it in 8-15 days. However, many lower income people (who get the EIC) may not have checking accounts for direct deposit and have to wait 3-4 weeks to get their check (which is still worth waiting for…in my opinion).

There is really no excuse for getting a RAL at this time of the year, since you could have filed a couple of weeks earlier and had the money by now. Everyone should have their W2′s and documents now.
- Erik Folgate
  
  Molly, you raise a good point that not all money coming back in the form of a refund is tax dollars that were over-withheld. Some tax credits such as the EIC will trigger a refund above what you over-withheld.
  
  I do not agree that families with a lower income should resort to getting a RAL, because it’s still money that they should never be counting on in their monthly budget. You’re right that some people don’t have a checking account, but I hope that financial education continues to spread and the amount without a checking or savings account will be reduced, because they won’t be living paycheck to paycheck anymore.
http://www.yourfinances101.com/blog David/Yourfinances101

All perfectly good reasons.

Not to mention the fac that this is YOUR money–why pay a penalty to get it a little earlier.

Show a little patience and get your full refund.

Whatever the reason is that you think you need it early can wait. Trust me.
Gina

I completely agree. Even better is to adjust your deductions so you do not even receive much of a refund–that way you can use YOUR money throughout the year!
D.D.

Very good Molly – now she has a handle on what is going on. You know what drives me crazy? It’s these elitist authors and misinformed bloggers saying something like this and not knowing the situation these people are in. Of course these products target lower-income people because they are the ones that need money now while higher-income people can afford to wait. And if you go to a reputable company, the fees and interest aren’t nearly as much as the media and bloggers say. And to show out of touch they are, this guy is writing about RALs in March. If people want their money fast, why would they wait until March to file – DUH! How come it costs me 10X as much to send a letter UPS as the post office or my ATM charges me a fee to withdrawl “my money.” Because time is a function of money and money is a function of time. Getting a RAL is stupid most of the time, but not ALL of the time as some people do need them. Just make it so the product is offered ethically. Why go after tax companies that do this once a year and leave check cashing places alone that do the same thing year-round?
- Erik Folgate
  
  First, I don’t think it’s fair that you call me an “elitist author and misinformed blogger”. This was an opinion piece, and if you disagree with me, that’s okay. I am a big believer in the freedom of speech, but you don’t need to peg me as an “elitist” when you don’t even know me or my financial situation. In the tone that I wrote this article, I expected opposition, but you gave the same answer that I always hear from people who defend payday, cash-advance loans (by the way, I have gone after payday loans companies in the past). The narrative for people who defend short-term, high-interest loans are that they are a tool for lower income families. This is simply not true. It’s predatory lending, and it’s not helping anyone. People in lower income situations don’t need you to enable them and tell them everything is going to be okay, just borrow your way to a better life. They need to be motivated and trained to increase their income, make wise financial decisions, follow a written budget, and eliminate their debt. These skills will empower them and take them from lower income to higher income.
  - http://madsaver.com Mac
    
    Erik, excellent answer to a comment that was kind of a mess. I don’t see any instance where a RAL is worthwhile. Even if a low-income person considers it “found” money, they can find it again in a few weeks later without paying any huge interest fees on it and make the money last even longer. I feel that these loans are popular with some people is because they don’t have a financial background and don’t understand the ramifications of such a loan. These lenders are nearly unethical in such lending practices unless they clearly explain the advantages & disadvantages. Of course, if they do that, nobody would take out a RAL.

Avoid The Tax Refund Loan

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