It’s getting close to tax time, and the H&R Block down the street from my house has one of those crazy-wavy-tube-guy things out front. It always reminds me of this video, which makes me crack up:
Speaking of tax preparers, you might be tempted to get your “refund” early by getting a refund anticipation loan. Don’t. As I have written before, refund anticipation loans are basically a payday loan in disguise (i.e., a really bad deal). Skip it, and file your tax return earlier next year if you want to get your refund faster.
Thanks to Tim Hwang for reminding me of the video.
When a tax-refund fraudster left a wallet with 13 debit cards issued in 13 different names — none of them his own — at a United Airlines ticket counter, it raised a few red flags. It also resulted in the bust of a huge tax-refund fraud ring, centered in Florida.
Here is how the fraud works:
Refund anticipation loans are very similar to payday loans; they are short-term, high-interest loans made in anticipation of future income — your tax refund, in this case. And they are a bad deal.
The best interest rate you can expect from a refund anticipation loan is around 36% APR. That is two or three times the rate someone with decent credit can expect to get from a credit card. But APRs of 100% or more are still common. That means if you paid the loan back in one year, you would actually pay back twice the amount you borrowed.
In other words, the math doesn’t make sense. It is much better to just wait for the check from the IRS.
Triple-digit interest rates used to be illegal. From Biblical times through the Middle Ages through English colonial law, people realized that the government needed to regulate the inherently unequal relationship between lender and borrower. One by-gone civilization that didn’t do this was ancient Greece, and they ended up with loads of literal “debt slaves.” Not exactly an enviable outcome.
In today’s small loan market, plenty of people borrow money at triple-digit interest rates. These rates show up in payday, car title, overdraft, and refund anticipation loans. Capping interest rates across the nation is a simple way of preventing this from happening and saving people lots of money, but that option was politically impossible for a long time. Now, that may be changing. Keep Reading »
The smell of tax returns is in the air, and so is the stink of shysters. Tax season means tax preparers and others are pushing high-cost refund anticipation loans. H&R Block, the popular low-cost tax preparation service, pushes refund anticipation loans on its “Fast Money Options” page.
Nothing is free, and nobody will pass up an opportunity to fleece you in exchange for giving you a short-term loan based on your anticipated refund. for example, if you want to walk out of your local H&R Block office with a $200 refund anticipation loan, you will pay what adds up to a 481% annual percentage rate (mirror; PDF link). You also pay $22.28-$77.23 in fees! That means that, after all is said and done, you will get about half your refund.
Refund anticipation loans (often called “RALs”) are basically just payday loans under another name. And just like payday loans, they come with hefty rates and huge fees.
If you really need that refund, just file your taxes early. Refunds come back pretty quickly if you file in January or February instead of waiting for April. Or, you are really better off getting a cash advance on your credit card. Or selling a few things on eBay. The problem with short-term, high interest loans is that they are often a “last resort” for people who have no other options. But if a person has no other options, how will they pay off the loan?