Posted by Mike Smith :: February 11, 2008 @ 7:53 amA common practice at tax time is for tax preparation services to offer refund anticipation loans to their customers. While the costs of such loans are coming down and fewer people are using them, they nonetheless should be avoided.
It sounds like a great idea: walk in with your tax information, and walk out with a check. That’s how simply the same-day refund anticipation loan process is usually marketed. Other alternatives, like receiving a check within a few business days, are also common. Even if the process is that easy, it doesn’t mean that you should take advantage of it. As with any loan, there are costs involved, and taking a refund anticipation loan will cost you money in the form of fees. Even though the fees may not seem like a lot of money, the short-term nature of the loan makes them unacceptably high. Such loans are very similar to payday loans. Many consumers, who would never consider a payday loan, are using refund anticipation loans without realizing how expensive they can be.
The good news is that there has been some progress in reducing the number of refund anticipation loans. The National Consumer Law Center reports that for tax year 2005, the number of refund anticipation loans was estimated at 9 million, down from 12 million for the previous year. One of the main reasons for this decline, in addition to consumer education, is that taxpayers who E-file and elect direct deposit get their refunds from the IRS in as little as a week, with most arriving within two weeks. There’s seldom a need so pressing that you can’t wait a week or two to avoid the costs associated with a refund anticipation loan.
Lower income workers are more likely to paper file and less likely to have a bank account. That means that those who probably need their refund the most will have to wait the longest to get it. As a result, they may be the most enticed to take out a refund anticipation loan. Everyone who considers a refund anticipation loan would likely be better served with a more affordable alternative, such as a low interest rate person-to-person loan from Lending Club.
If you are in desperate need of your tax refund and don’t want to take out any type of loan, file as early as possible, file your return electronically, and use direct deposit. For future planning, consider adjusting your withholdings so that you’ll get your money throughout the year instead of as a lump sum payout in the form of a tax refund at the end of the year.
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