Feature Articles: Taxes
Refund Anticipation Loans: Are they worth it?
Brenda Procter, M.S., State Specialist & Instructor Personal Financial Planning, University of Missouri Extension
For families trying to make ends meet, getting the W-2 forms needed
to file for a tax refund is exciting. After waiting all year, struggling
families can get a large lump sum to pay off bills, solve other financial
problems or purchase something that they really need or want.
Quick tax loans, or refund anticipation loans, sound like a great
idea for taxpayers who are in a hurry to get a refund. You can go to
a paid tax preparer to get your tax return filled out and filed electronically,
and you can borrow the value of your anticipated refund immediately.
The IRS national taxpayer advocate says there are 1.2 million known
commercial tax return preparers. Between 300,000 and 600,000 of them
are unregulated. There is a good reason that tax preparers heavily promote
refund anticipation loans. In 2004, according to the Consumer Federation
of America and National Consumer Law Center, refund anticipation loans
cost U.S. taxpayers nearly $1.6 billion — that is $1.6 billion that
could have been spent on bills or items that families need or want.
Are they really worth the cost? Many people have a real distaste
for filling out forms, and if you don’t think about the high cost of
interest, the fees may not sound that bad. But refund anticipation loans
can greatly erode the value of a tax refund, and they may not be necessary.
They cost borrowers from $30 to $120 in loan fees, and around $40 in
electronic filing fees — for a loan that lasts about 10 days. Refund
anticipation loans carry annual percentage rates (APRs) of 40 percent
to over 1,800 percent, according to the National Consumer Law Center.
There is another potential pitfall with refund anticipation loans.
If, for any reason, the refund does not come back from the IRS in the
amount the preparer told you to expect, you will have to repay the tax
service or its loan company the full amount of the difference anyway.
If you’ve already spent the full amount of the loan, that presents a
Not only do paid tax preparers offer refund anticipation loans, but
so do some check cashers, payday lenders, used car dealers and title
loan lenders. Some rent-to-own centers are getting into the act as well
through a partnership with major tax preparers.
Those who choose to use refund anticipation loans can ask key
questions to become fully informed. As with any major decision, it
can pay off to check around. Consider checking out at least three
paid tax preparers if possible. Ask about fees and the terms of the
loans they arrange. Here are some of the questions you will want to
ask the preparers:
- What credentials do you have to prepare taxes?
- How much do you charge for filing a tax return electronically?
- What is the total dollar amount of all the fees and charges that I will have to pay?
- What is the estimated annual percentage rate of the loan?
- What percentage of the total refund will be paid out in other fees?
- How long will it take to get the proceeds of my loan?
- Can you file my return electronically if I don’t take out a refund anticipation loan? If so, how long should it take to get my refund?
- How long will you be in business after tax season?
- Will you assist me with any IRS inquiries about my return?
- Will you be responsible for mistakes on my tax return?
It is often not necessary to turn to such costly services and loans. Free help is available in many communities through the Volunteer Income Tax Assistance (VITA) program sponsored by the IRS. VITA provides trained volunteers who can fill out and electronically file tax returns for low- to moderate-income families for free. The refund will come back within two weeks or less (and even faster for those who have their refund check deposited directly into a bank account).
The AARP also sponsors Tax Counseling for the Elderly
(TCE) sites in many communities. AARP sites will sometimes
provide services to low- to moderate-income taxpayers as well.
For help locating the VITA or TCE site nearest you, call the IRS at 1-800-829-1040 or contact your nearest Community Action Agency or University of Missouri Extension office. Additional information for those in Missouri can be found at http://extension.missouri.edu/hes/taxed/vitasites.htm
Somerville, K. Navy Legal Service Office, Beware of the Income Tax Instant Refund, January 27, 2006, Navy Compass website at http://www.navycompass.com/.
White, J.R. Paid Tax Preparers: Most Taxpayers Believe They Benefit, but Some Are Poorly Served, United States General Accounting Office, April 1, 2003.
Wu, C.C, and Fox, J.A., Picking Taxpayers’ Pockets, Draining Tax Relief Dollars: Refund Anticipation Loans Still Slicing Into Low-Income Americans’ Hard-Earned Tax Refunds, The NCLC/CFA 2005 Refund Anticipation Loan Report, Consumer Federation of American and National Consumer Law Center, January 2005.
Last update: Friday, January 22, 2016