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February
2004 Consumer
Advisories
Rapid Tax-Refund Loans
A very costly way to gain just a few days on tax refunds
It's tax
season, and tax-preparers may invite you to get a "Refund
Anticipation Loan" or "RAL" - a loan borrowed against the
expected tax refund. Such a loan may come a few days faster
than the refund - but you pay extremely high fees to borrow
your own money.
Remember, a "Refund Anticipation
Loan" is just that - a very short-term loan, secured by your
expected tax refund, arranged by a tax preparer through a
bank. You pay finance charges. The loan is repaid when the
IRS sends your full refund to the bank.
The key
question is, How much do these loans cost the borrower? According
to a recent report by the Consumer Federation of America and
the National Consumer Law Center, the loans cost about $30
to $90, depending on the size of the refund. That means the
interest rate on "RAL" loans could range from about 67% APR
(annual percentage rate of interest) to over 774%. That's
a bad bargain for an "advance" of just 7 to10 days. Consumers
need to ask tough questions:
- "How
much will I pay for the loan?"An average refund
is about $1900, with a typical finance charge of $75 for
a refund anticipation loan -- a 144% APR. And fees for tax
preparation, electronic filing, or check-cashing add a lot
more expense. (For example, fees ate up 11% of one Iowan's
earned income tax credit last year.)
- "What
does the fee buy me?" An RAL loan
gets your refund to you in 1-2 days, compared to just 10-14
days if by ordinary electronic refund deposit to your bank.
The Consumer
Federation/Consumer Law Center report notes that about 40%
of those who get refund anticipation loans are filing for
"earned income tax credits" - payments under the federal program
that entitles some low-income workers to a payment even when
they don't owe income taxes. The report indicates that almost
$270 is subtracted from the average $1600 earned income tax
credit refund when all fees are added for tax preparation,
electronic filing, check cashing and the loan fee. That's
a lot to pay for a payment that comes just a few days faster.
The best bet? Avoid high costs -- get free help from organizations
that assist low-income filers. For a "Volunteer Income Tax
Assistance" site or AARP site near you, call 1-800-829-1040,
or click on links below.
Click here for a link to
Volunteer Income Tax Assistance or "VITA"/AARP sites around
Iowa. (List provided by IRS.)
Click here
for information on who is eligible for VITA assistance, and
what information is required for tax preparation. (Information
provided by IRS.)
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