Posted by Mike Smith :: February 12, 2008 @ 5:26 am

In a recent post, I gave an overview of refund anticipation loans, which are loans that people take out from tax preparation services in order to receive their tax refunds sooner. I wanted to add some data to support my claims that these loans, like payday loans, are expensive and should be avoided.

The data cited below comes from the early release of the 2008 report on refund anticipation loans compiled by the National Consumer Law Center and the Consumer Federation of America. These consumer advocacy groups prepare this report, and others, on a yearly basis. A full copy of the report can be downloaded here.

There are typically three parts to the fees charged for refund anticipation loans: a refund account fee, a bank fee, and a processing fee. The refund account fee is used to create a temporary bank account that the borrower will use when repaying the loan. The bank fee is charged by the bank loaning the money, and the processing fee is charged by the tax preparer itself. Different companies charge different amounts for these fees, so overall costs do vary.

The report showed the combined bank and refund account fees to range between about $58 and $110 for a refund anticipation loan of $2,600. That loan amount was chosen because it is the average refund for American taxpayers. Processing fees, when disclosed, varied between nothing and $40. Those wanting their refund anticipation loan the same day could expect an additional $25 to $85 in fees. Other fees, such as a $20 surcharge for a paper check versus direct deposit, were not uncommon.

Based on these fees, the report concluded that the effective APRs of refund anticipation loans range from about 80% to nearly 1,200%. Same-day loan fees pushed the effective APR over 1,400% in some cases.

One final note on refund anticipation loans is that they must be repaid in full, regardless of the amount of your actual income tax refund. So if your return is prepared inaccurately, or if you receive a smaller refund than expected (or no refund at all), you are still responsible for repaying the loan in full. If you’re desperate enough to take out a refund anticipation loan, then you will likely have a difficult time repaying the loan without your expected refund. Adding this risk to the unbelievably high interest rates and fees, you can see why we so strongly advise you to avoid using a refund anticipation loan.

Again, many consumers considering a refund anticipation loan would be much better served with a person-to-person loan from Lending Club. It’s easy to beat the interest rates offered by refund anticipation loans, but borrowers are turning to Lending Club because they can get even better rates than those of traditional funding sources like banks and credit cards.