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January 2010
Beware of rapid refund loans
Need cash right now? Can't wait even a few days for your tax refund? You're in luck. Lots of businesses will be glad to offer you a "rapid refund" loan. You'll get your money today, maybe even this very hour. No patience needed.
Here's how "rapid refunds" often work. A tax preparation business works with a bank or finance company that has money to lend. Based on an anticipated tax refund, the taxpayer signs a contract in which he or she takes out a short-term loan. Information on the tax return instructs the Internal Revenue Service to deposit — into an account at the lending institution — the taxpayer's refund, which is then used to repay the loan.
According to the FBI, there are over 14,000 scam artists at work on any given day. Perhaps the information presented here will help you avoid becoming a victim. If you have questions, please call us. Remember, if it sounds too good to be true, it may well be a scam.
Make no mistake. "Rapid refunds" are high-interest loans, not tax refunds from the IRS. Let's say you're entitled to a tax refund of $500. If the business charges $29.95 in bank fees (interest) and $36 in loan fees, your refund is already reduced by $65.95 or 13 percent. Annualized, that interest rate adds up to almost 50 percent, which doesn't include the cost of preparing and filing the tax return itself. By the way, if there's a problem with your tax return and the IRS reduces the refund amount, you're still on the hook to repay the loan.
Businesses offering these types of loans (also known as Refund Anticipation Loans or RALs) sometimes prey on folks who can least afford it. One study found, for example, that 55 percent of all RALs are filed by individuals or families who qualify for the Earned Income Tax Credit (designed to offset income taxes owed by low-income people). In addition, some companies fail to divulge fees, charges, and interest that consumers accrue with "instant money" loans. Some set up shop in car dealerships or rent-to-own stores, hoping that consumers will spend that "rapid refund" as quickly as possible, perhaps on a down payment for a new car or a big screen television.
Is getting your cash a few days early really worth paying excessively high interest rates? If you file your taxes electronically and have your tax refund deposited directly into a personal bank account, you'll likely get your money in as little as two weeks. At no additional cost.
Isn't that a better deal?
